International trade transactions are pretty simple. For everything you import or export, payments are made through banking channels.
However, this has changed since the Taliban returned to power in Afghanistan. The US authorities froze the Afghan government’s foreign accounts and Afghanistan’s banking network is not working properly. So, if banking channels are not working, how is the country making payments for essentials that it imports. How is it receiving money for the products it exports?
The answer is: the Hawala and Hundi networks.
A Peshawar businessman involved in the Pak-Afghan trade explained that although the Afghan government takes taken steps to show that legal requirements are being fulfilled, the reality is that businesses are using informal banking channels or Hawala and Hundi to conduct trade.
Hawala/Hundi dealers are exploiting the conditions and have increased the scale of their operations to further embed their roots again in the region.
How does the Hawala network operate?
Hawala is an illegal financial system that runs parallel to the banking channel. This is how it works: person A has to receive money from person B. Both of them live in different cities and don’t want to use a banking channel for the transaction. In such a scenario, B will tell A to go to C, a Hawala agent who lives in the same city as A and give his Hawala (which means reference in Urdu). C hands the money to A. B makes the payment to D, who is connected with C. The hawala operators charge a fee for their services.
Afghan trade and Hawala/Hundi
Afghanistan mostly exports fruit and vegetables to Pakistan for which payments are made through cash or Hawala.
For exports, Pakistani traders have to follow rules and procedures set by the State Bank of Pakistan and Customs.
The problem is how to bring dollars earned from exports from Afghanistan since the banking channels in the country are not working.
The SBP allows Afghan traders to submit payments in advance with banks in Pakistan and get e-forms. There are two problems with this approach: there’s a shortage of dollars in Afghanistan and bringing cash from Afghanistan is a huge risk.
Local traders have figured out a way around for this. They buy dollars from the local market in Pakistan and submit it to banks to obtain e-forms. They receive the payment for such shipments through Hawala. This is for Pakistani products such as wheat, cement etc. that are exported to Afghanistan.
There are several goods that are first imported to Pakistan and then exported to Afghanistan. For such items, people sitting in Pakistan buy dollars from the local market but receive payments for it from Dubai through Hawala. This way Hawala networks operate simultaneously in Kabul, Peshawar, Chaman, Karachi and Dubai.
SBP’s efforts to discourage unnecessary buying of dollars and its impact
The State Bank of Pakistan has taken several steps to curb the unnecessary trade of dollars in the country. The SBP started bio-metric verification and asks people to fill in forms explaining why they are buying the dollars. Recently, the central bank also set a limit of how many dollars you can buy at once.
But these new rules made traders reluctant to buy dollars from legal currency dealers, said Sarhad Chamber of Commerce and Industries vice president Shahid Hussain.
This is because not only has a limit been set but traders also have to provide a complete record of the transaction. Beside this, the Federal Investigation Agency also questions traders, Hussain said.
The situation right now is that people who already have e-forms, are using them, he said. If the Pakistani government doesn’t figure out a way to trade through the barter system or in Pakistani currency, trade will be adversely impacted, Hussain warned.
Forex Association of Pakistan chairman Malik Bostan said the SBP’s measures are increasing the black marketing of dollars and pushing people to illegal money changers and Hawala/Hundi traders. In Kabul, the dollar is Rs10 more expensive than the SBP’s interbank rate, he said. In Chaman and Peshawar, it’s Rs5 over the interbank rate.
Zafar Paracha, general secretary of the Exchange Companies Association, said that the dollar is being sold for Rs185 in Karachi in the black market. In Chaman and Peshawar, the rate is around Rs191.
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