Against the drop scene of a huge plunge in Pakistani rupee against the US dollar in the last few days (leaving USD-PKR parity to 1:105 to 1:108, according to the official exchange rate and the open market, respectively), there is an apparent hue and cry amongst masses.
President of Karachi Chamber of Commerce and Industry (KCCI), Mohammad Haroon Agar, was quick to issue a statement representing the concerns of the business community on an almost free fall of the national currency against USD. However, for those who are familiar with the conditions of the recent provisional sanctioning of the IMF loan of US$5.3 billion to Pakistan, it did not come as a surprise as they found it something written on the wall.
Prior to the IMF package the State Bank of Pakistan (SBP) was engaged in stabilising PKR exchange rate vis-à-vis other currencies, especially USD, this is no more the case as it is now restricted as per the IMF conditions.
Given that the government borrowing is expected to increase, the budget deficit is moving on an upward path, increase in inflation is only imminent, and that it is not in the best interest of the domestic business to increase interest rates, the government of Pakistan has very few options to manoeuvre its economic policy.
One area that may offer a ray of hope is the foreign remittances sent home by the overseas Pakistanis working abroad and those who may be termed as Permanently Settled Overseas Pakistanis (PSOPs) or the so-called Pakistanis with dual nationalities. While the remittances sent home by the overseas Pakistani workers in the Gulf region and elsewhere cannot be increased by a magic wand, there is a possibility to attract foreign remittances from the PSOPs, if an immediate and aggressive campaign is run in the countries where PSOPs have big clusters.
Needless to say that such a campaign will be more successful if the rich people sitting on the top of the pyramids of the government start repatriating some of their wealth banked overseas. Without speculating on the wealth of the ruling Sharif family and many other members of the parliament on both sides of the political fence, one may easily conclude that this amount is not insignificant.
If these parliamentarians and members of different political parties, bureaucrats and even retired top officers of the armed forces bring a portion of their wealth from the overseas, significant sums of foreign exchange will flow into the Pakistan economy. This will encourage PSOPs from around the world to send money to the country of their origin, either into their bank accounts or for investments of different types.
Diaspora sukuk should be available to all the PSOPs (or for that matter any foreign institution or individual) to invest in Pakistan small amounts of money on a regular basis.
The key to success of this initiative will be availability of financial products to PSOPs. One possible product is a Diaspora sukuk. The Diaspora sukuk should be available to all the PSOPs (or for that matter any foreign institution or individual) to invest in Pakistan small amounts of money on a regular basis.
The proposed product should be a Sharia-compliant version of prize bonds, which are very popular domestically with over Rs 350 billion raised through this savings instrument. According to the London-based Edbiz Consulting, a global Diaspora sukuk is expected to bring between USD350 million and USD3.5 billion on an annual basis from the PSOPs based in the countries in the Western hemisphere. This will be in addition to the USD13 billion annually sent home by the overseas Pakistanis.
The proposed Diaspora sukuk should attempt to incentivise the prospective investors to the maximum, by making such investments completely tax-free. While the PSOPs and other overseas Pakistanis may be willing to forego any return on their investments, they would like to keep the value of their investments in tact.
Hence, the proposed Diaspora sukuk should be denominated in a relatively more stable foreign currency like USD or GBP. The real incentive for most of the investors would be the prospects of winning Sharia-compliant and tax-free prizes. The amounts of these prizes should be big enough so that they are seen as a life-changing prospect. For example, a prize of USD1 million is a life-changing event for most of the overseas Pakistanis working in different Gulf countries.
Such products are not very many in number in the Islamic world but one notable example is National Bonds in the UAE, where it has proven to be a very successful product not only helping the locals to save in a Sharia-compliant way but also in attracting investments from the people from other countries.
The government will have to think out of the box to stabilise the PKR exchange rate vis-à-vis other currencies, while maintaining the supremacy of the market forces of demand and supply. Other short-term measures may include restricting imports to the country by revising tariffs on luxury items and other consumer goods that are fast replacing local brands on the shelves of an increasing number of high-end departmental stores in big cities.
While machinery and industry-related equipments are essential import items, luxury brands and consumer items can be restricted by imposing higher taxes on their import, sale and consumption. In the medium run, the government should also expect to attract foreign direct investment (FDI) in the country, which dried down in the last five years.