Tera Kya Hoga Kalia?

The Government has taken action against one of the biggest exchange companies operating in Pakistan, Khanani & Kalia. They have been accused of illegally smuggling out billions of US dollars over a period of 5 years and specifically for the last 6 months when Pakistani Rupee was stretched to its limits. The Rupee has depreciated by some 23% since July. The Forex reserves at $16 billion in July, are a mere $7 billion now. Although, majority believe that it has got more to do with the current account deficit (trade deficit ballooning to US$7.2 billion for July-Oct 08) but someone wants us to know that other facors are involved too.

State Bank has suspended the licence of Khanani & Kalia for one month due to the action of Federal Investigative Agency (FIA). It is suggested in news report that FIA had warned the government of the flight of capital through exchange companies couple of months ago but no action was taken. Now suddenly, the Govt has woken up to the 'cause' and arrested to directors of the company.

'Hundi' and 'hawala', are the two most used methods of 'unofficial' transfer of forex in and out of country. Remittances sent by oversees Pakistanis mostly find these routes because they are quick, efficient and arbitrage is good. After 911, crack down on unofficial channels and strict monitoring of financial flows somewhat hindered their network and instead more and more Pakistanis are sending their remittances through official channels. Government and central bank have been trying to bring them in to the net of official economy so to harness more available resources. For this reason State Bank started offering licences to exchange companies.

Now what role can these exchange companies play. Apart from being a secondary channel of forex inflows and outflows, they can participate in currency smuggling. Afghanistan is a good market right now for American dollar as it brings you good value so a lot of smuggling of dollars has taken place through Afghanistans border. It can also be used to transfer money out on fictitious transactions for example buying real estate in another country although there will be no transaction.

So how did Khanani & Kalia operate? No one knows for sure. FIA has seized computers and stuff so they 'know' how they operated. I just dont understand why no action was taken before and 'suddenly' the bosses of this company are in custody - keep in mind that it involved 'senior bureaucrats and politicians'. Kaalia says he'll spill the beans. I have my fingers crossed. Also keep in mind that exchange companies and unofficial channels have been doing it for a very long time and its nothing 'new'. Some even suggest that the size of this informal mode of transaction is almost 40% of the total transactions.

So what is really cooking. I guess I wrote this whole post just for the title. damn me.