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Specialized Investment Facilitation Council And The Promise Of Economic Revival

Pakistan’s national policy has witnessed a series of intriguing and, in some cases, unsettling developments over the past two weeks. These developments, which are primarily focused on the domain of tech policy, provide infinite material for debate regarding their direction, methodology, and the numerous voids in their interconnections. However, it is more interesting to examine them as pieces of a larger policy conundrum and agenda.

The Specialized Investment Facilitation Council (SIFC), or as I still prefer to refer to it, maintains its unique status within Pakistan’s policy environment. It walks a thin line between the Eighteenth Amendment and the wish to circumvent the Constitution. This entity is viewed as a means to regain control over national policy and resources by both the deep and superficial portions of the state apparatus. Therefore, the recent announcement of plans to attract $100 billion in investments was both expected and natural.

These events may one day be categorized as one of the most significant voluntary political surrenders of our era in the chronicles of history. Nonetheless, this concession was a pragmatic necessity to advance multiple policy objectives.

Idealistically, it should now provide the necessary stability and longevity to numerous initiatives and investments within our provincialism-ridden and politically contentious policy and regulatory domains. But can we expect the SIFC to be an effective platform for attaining its stated objectives? What specifically are its objectives in commercial and quantifiable terms?

A proposal to increase exports of software and associated services to $20 billion is the IT industry’s most explicitly stated policy objective to date. This ambitious objective, nearly tenfold the current annual exports of $2.5 billion, was recently proposed by our Interim Minister for IT and Telecommunications. In addition, there is talk of adding an additional billion or two over the next few months by streamlining public sector procedures. With one exception, these developments supplement the investment-specific initiatives listed on SIFC’s website. The idea of establishing seven new geographically distinct Software Technology Zones (STZs) has evolved into a cyberspace presence.

Are these new developments indicative of the IT agenda’s gradual expansion? Or is it a realization that we might be missing the forest for the trees? Alternately, would on-the-job training in the planning and execution of national infrastructure initiatives suffice? The true answers to these queries may elude us eternally. Regardless of the objectivity that these new additions provide, they only convey half the story.

Opportunities related to the public sector and governance, as well as global technology actors and platforms, are eerily absent from SIFC’s published IT strategy. Given that we are already implementing numerous public sector modernization programs with the assistance of multilateral partners, the absence of the former is surprising. Regarding the latter, our strategy of framing our relationship with them through the prism of security and content governance poses difficulties for all involved parties. In addition, there is an urgent need for policy and regulatory framework reforms. Rather than dwelling on the challenges or opportunities, it’s worth noting how other countries, including Arab nations and India, are navigating this space.

The government has outlined plans to conduct a 5G procurement by June 2024. Since 2020, the regulatory intent to hold this auction has been in effect. We have yet to observe a commercially viable local use case for 5G networks, and the opinions of our telecom executives may differ on this matter.

The Caretaker cabinet has recently modified the criteria for appointing a new Chairman of the National Database and Registration Authority (NADRA). The implications of this action suggest that the ‘National Security’ Trojan horse has arrived at the gates of our civil liberties. It is prudent to refrain from investigating this topic further. However, it does not take a rocket scientist to foresee its potential utility in regulating domestic politics and its subsequent influence on a variety of other aspects of our lives.

Our leaders must recognize that the words of a government and its leaders are frequently interpreted not only for their literal meanings, but also for the policy implications they carry. Today, the value and scope of the potential that SIFC hopes to exploit, at least for the IT industry, are largely undefined. The only aspect of which we are aware, through government announcements, is the weekly transfer of a few billion dollars here and there. Perhaps it is due to inadequate public relations, or perhaps our geese are not yet in a row. In addition, there is the difficulty of an incomplete agenda and the taint of dirty policy actions.

Credibility carries significant weight, particularly when pursuing investors and collaborators. The adoption of a “blast, bulldoze, and disregard” strategy by those in authority is detrimental to an already unstable investment climate. Such language is not only unorthodox, but also impolite in the sphere of policy discourse. “When you have to shoot, shoot; don’t talk!” appears to be sensible advice in this situation.

These developments raise four relatively simple questions: Is the current policy agenda geared toward reform and economic expansion, or is it merely a search for desperately needed funds? Are our multilateral partners, especially the IMF, on board with this plan, and do they concur with the projections? Will countries like Arab nations invest without the IMF’s sanction or third-party validation of our projections? How will these short- and long-term effects benefit our economy and our lives?

It’s imperative to note that dollar’s open market rate has been subdued, falling below Rs. 300 from a zenith of over Rs. 340. As the government had agreed with the International Monetary Fund (IMF) to maintain the difference between the open market rate and the interbank rate below 1.25 percent, the previous increase in the rate caused concern. In the past few weeks, however, this disparity had crested at approximately 9 percent.

The surge in the open market rate occurred primarily due to parallel market transactions and stockpiling, which led to pressure on the interbank rate, regulated against the open market. In addition, as the gap widened, dollar liquidity was diverted from banking channels to the grey market. As a consequence, the government took swift action, with both civilian and military agencies in Pakistan spearheading a nationwide assault on money exchange firms involved in unrecorded dollar transactions.

The interbank market, as the name suggests, functions as a platform for dollar transactions between institutions. Consequently, it is subject to stringent regulation, making any form of speculation quite challenging. Furthermore, even if conjecture were to occur, it would be short-lived and promptly curtailed by the State Bank of Pakistan (SBP).

In contrast, the open market, which is serviced by money exchange companies, serves as a retail outlet for the purchase and sale of foreign currency. This market’s primary inflows are remittances, while the demand is driven by individuals contemplating international travel.

However, market participants have engaged in illicit dollar trading, primarily in two forms. First, they sell dollars at a premium to walk-in consumers while keeping these transactions off the records and not reporting them to the SBP. This transaction is solely speculative and motivated by the desire to generate fast profits for both parties.

The margins created by the rate allow exchange companies to purchase dollars from consumers at a rate above the current open market rate. When this transaction is recorded on the records, reported to the SBP, and replicated on a large scale across the country, it sends a signal to the market, causing the exchange rate to increase.

Also implicated in the smuggling of dollars into Afghanistan are exchange companies. It has been widely reported that Afghanistan relies significantly on Pakistan for its foreign exchange requirements. This causes the dollar supply to disappear from the market, resulting in an increase in the exchange rate. The interbank market was feeling the heat, and the government could not afford to violate its agreement with the IMF. Consequently, the regulator was required to take action.

In response to these activities, the Federal Investigation Agency (FIA) carried out a crackdown on money exchanges, detaining individuals involved in the unlawful trade. In addition, FIA personnel were stationed outside of key exchanges to monitor transaction flows, creating a strong incentive for market participants to stop conducting unrecorded transactions. As a consequence, individuals began to divert their foreign exchange earnings to the interbank market, resulting in an increase in liquidity.

In addition, numerous currency exchanges were conducted in order to return surplus dollars to institutions, most likely as a result of unrecorded transactions. This further enhanced the interbank market’s liquidity. According to Yousuf Farooq, the director of research at Chase Securities, “The convergence is largely the result of a crackdown on double books and smuggling by exchange companies.” Devaluation will boost exports and reduce imports in the future. In the coming months, the convergence could reduce the rate of rupee devaluation and moderate inflation. However, only an increase in exports and fiscal discipline can address the problem permanently.”

However, it remains to be seen how long the exchange rate can be effectively controlled through the use of force, given the generally pessimistic market sentiment towards the rupee. The outlook is influenced by the external account position, which remains under pressure. Although administrative measures have reduced imports, difficulties with working capital and financing for the local industry have contributed to a decline in exports. Furthermore, the flow of remittances has been unstable.

In some ways, Pakistan is replicating the 2013 counter-revolution and coup in Egypt, which brought General Sisi to power and placed the ‘Arab Spring’ genie back into its container. It may be optimistic thinking to anticipate very distinct long-term outcomes, despite sporadic episodes of optimism due to an IMF agreement or a clearing-the-decks devaluation here and a supply-side liberalisation and privatisation deal there.

The views expressed in this article are the author’s own and do not necessarily reflect Coverpage’s editorial stance

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