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Exchange and payments reforms in Pakistan.

Major concessions have been provided to attract foreign capital. Moreover, necessary foreign exchange facilities fore exports have been allowed without discrimination. Flight of capital will be considerably checked and travelling abroad for business shall be facilitated. There are obviously substantial relaxations of restrictions in the right direction, which can be expected to pay due dividends.

Pakistan economy as to advice higher standard of output in manufactures and agriculture, and along with that substantially higher volume of foreign trade has to be attained. Beside this, invisible foreign exchange earnings process considerable scope for expansion. The present government has issued a number of policy statements related to privatisation of industries, deregulation of investment and achievement of higher degree of self-reliance. The purpose to initiate these measures is to encourage private enterprise to invest on a large scale in relatively sophisticated industries. Electrical and mechanical engineering industries, food and beverages and transport goods can be mainly included in this list. For this, not only long term domestic private investment is required, but it has to be substantially supplemented through foreign investment, as well as by non-resident Pakistanis funds, who have acquired considerable financial capacity.

To facilitate foreign investment and trade, the government has announced a package of "Exchange and Payments Reforms in Pakistan". Here we attempt to briefly highlight the main features of these reforms and assess the likely impact on foreign investment, foreign trade and foreign exchange dealings.

In the area of foreign investments, the government prefers to encourage those investors who intend to enter in capital intensive manufacturers e.g. those of engineering and transport. Likewise, this investment should accompany sophisticated technology, which may eventually assist in higher degree of import substitution and export expansion. In this area, package deals are also encouraged with such foreign firms which not only transfer their technology, but also introduce modern management and assist in evolving an efficient marketing network to get access to foreign customers. In fact sub-contracting in apparel and light engineering goods can easily e achieved, if foreign investors are appropriately attracted.

The total foreign investment in 1987-88 was at the level of Rs. 4.3 billion which almost increased fourfold by 1989-90. However, still that level is noticeably low. The new package of reforms in respect of investment are formulated with a view to liberalise the entry and repatriation of profits.

Prior to these reforms, government's approval for issue of capital as well as State Bank's approval for issue and export of shares to non residents was required even for investment in industries which are not launched. This requirement has been done away with and the company concerned has only to submit the prescribed returns to the State Bank of Pakistan. No approval of the government or State Bank is required. Similarly, foreign nationals, including Pakistan holding dual nationality, were not allowed to invest in existing enterprises on repatriable basis. Now such restriction has been lifted. The only requirement is that investment shall have to be made in the shares of existing industrial ventures through the stock exchange at the current market price paid in foreign exchange and certified by an authorised Stock Exchange broker. Repatriation of dividend and disinvestment proceeds can be made through authorised dealers without obtaining State Banks' permission.

Another major concession is that foreign controlled manufactures, who export more than 50 per cent of their production, can borrow for their working capital needs from domestic financial agencies without any limit and without prior approval of the State Bank. Earlier, there were several restrictions and sub-conditions attached.

Further, foreign companies are henceforth allowed to remit their profits without prior approval of the State Bank. "Previously State Banks' approval was necessary. However, this concession can not be availed by foreign banks, insurance companies, foreign airlines and shipping companies.

These relaxation of rules for foreign investment will considerably facilitate repatriation of profits on foreign investment and obtaining credit for working capital from local agencies. Naturally, greater attraction is provided to foreigners to undertake joint ventures or purchase shares in domestic enterprises. One major advantages of foreign investment is that government's dependence on foreign borrowing will be appreciably reduced. Foreign investment often accompany modern technology, hence increased transfer of technology can be realised.

In the foreign trade sector, no reliance will be required henceforth for importing items placed in the free list which has been extensively extended. Now an importer can directly open an L/C with a bank on payment of prescribed. For exporters, some restrictions where placed on exports to be made by foreign companies. These restrictions have been lifted to ensure enhanced export performance. Currently exports are in the region of 5 billion dollars. With limited prospects of foreign aid, export volume has to be substantially extended. The new rules will assist in importing the required imported intermediate goods and expansion of exports.

In the area of foreign currency accounts, major concessions have been announced. The proceeds of Foreign Exchange Bearer Certificates and foreign currency notes can henceforth be transferred to the foreign currency accounts without any declaration to customs authorities. Moreover in future, there will be no limit on withdrawal from the foreign currency accounts in the form of currency notes. This will ensure larger balances in foreign currency accounts.

Pakistani residents will henceforth be allowed to maintain foreign currency accounts. This will go some way in restricting flight of capital from the country. In respect of foreign exchange holding and travel abroad, general permission is granted to persons leaving Pakistan to take out any amount of foreign exchange. Similarly, Pakistanis coming from abroad, bringing foreign currency with them, can retain it, provided that foreign currency does not represent sale proceeds of goods exported from Pakistan. Similarly, other necessary relaxations in keeping and remitting foreign exchange have made. The limit of foreign exchange maintained by resident Pakistanis' abroad has been raised from $500 to 1,000. Similarly, remittances in respect of all export claims will be allowed by authorised dealers with prior permission of the State Bank: There will be henceforth no limit on remittances of examination fees claimed by foreign institutions and Pakistanis will be permitted to pursue, even under graduate studies abroad, for which foreign exchange remittance can be arranged through authorised dealers.

This brief assessment shows that major concessions have been provided to attract foreign capital. Moreover, necessary foreign exchange facilities for exports have been allowed without discrimination. Flight of capital will be considerably checked and travelling abroad for business shall be facilitated. There are obviously substantial relaxations of restrictions in the right direction, which can be expected to pay due dividends.
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Author:Kadri, Ashfaq
Publication:Economic Review
Date:Oct 1, 1991
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