Pakistani Banks Made Huge Illegal Profit In 2022: Standing Committee

(MENAFN- Khaama Press) Pakistan's slow economic train witnessed an unprecedented 'heist' in 2022 that has come to light now. Facts of the illegal profiteering came to light recently when the Senate's Standing Committee on Economic Affairs, in a meeting (23 September), severely castigated the State bank of Pakistan (SBP) for the lenient penalties it imposed on commercial banks.

These banks have been accused of orchestrating a Pakistani Rupee 65 billion (approximately US$ 2.38 billion) 'heist.' Dawn reported that the SBP showed 'leniency' in penalising commercial banks involved in the siphoning off funds through the unauthorised imposition of higher charges for opening Letters of Credit (LoCs) on imports in 2022. That the 'heist' has been discovered two years after the event reflects poorly on Pakistan's financial management systems and in the current situation, will only add to the woes of the severe economic crisis that afflicts the country.

Back in 2022, Pakistan was amid a severe foreign exchange crisis, and some of the largest commercial banks manipulated exchange rates by over-invoicing LoCs used for imports. Once these facts came to light, lawmakers expressed outrage at the regulator's failure to hold banks accountable and instead let them go with fines totalling Pakistani Rupee (PKR) 1.4 billion, a fraction of the banks' staggering PKR 65 billion pocketed.

The circumstances in which this illegal transaction took place requires a more thorough investigation into the role of Pakistan's largest banks, is the demand of the Senate Standing Committee as the banks had exploited exchange rates for personal gain. At that time, the economy was in shambles due to a complex set of factors including dwindling foreign exchange reserves, high inflation and a rapidly depreciating rupee. With foreign exchange reserves having fallen to critically low levels of below US$ 8 billion, barely enough to cover a few weeks of imports, the shortage of forex created the basis for the scam. In an environment where shortage of forex shortage prevailed, businesses were desperate to secure foreign currency for imports.

This created conditions for the banks to manipulate the system by overcharging for LoCs, which are a crucial instrument for international trade and to guarantee payment for imports. The question that arises, is whether the inflated LoC charges were unavoidable? Analysts argue that importers were left with little choice as they had to pay exorbitant rates, straining their operations and increased costs for consumers. With foreign currency reserves severely depleted and the PKR sharply depreciating, several banks used the opportunity to overcharge importers who were desperately looking for US dollars.

Obviously, these inflated fees permitted banks to make significant profits, illegally, of course. As businesses and consumers struggled with soaring costs, the banks reaped billions in unlawful gains. The tragedy is that the manipulation went far beyond justified pricing and thereby transforming a normal safeguard into a tool to make profits. Playing the exchange rate's volatility, banks could make huge profits. The consequences were serious as it not only burdened businesses, but its impact was felt on the entire economy, increasing inflation and putting essential commodities out of reach of the consumer.

Senator Saifullah Abro, who chaired the Senate Meeting asked for details of profits earned by Pakistani banks through foreign exchange on imports. He also called upon the Economic Affairs Division to create a special desk for monitoring foreign-funded projects. The key observation made was criticism of the State Bank of Pakistan (SBP) for not taking timely action to prevent the over-invoicing of LoCs during the forex crisis decisively. There was also a call for a deeper investigation into the use of International Monetary Fund (IMF) funds and more stringent regulations to prevent such practices in the future. Perhaps unrealistically, Pakistan's Senators demanded that the unlawfully earned money be returned to the public treasury and that SBP adopt stronger oversight mechanisms. The question is who will bell the cat and recover the money?

Ishaq Dar, finance minister at that time, had reportedly conceded that banks had made“unreasonable' foreign exchange earnings and ordered an investigation. Deposing before the Standing Committee, SBP officials said they had investigated the matter and imposed fines totalling Pakistan Rs 1.4 billion on banks involved in“over-invoicing”. This naturally led the Committee to question the meaning of the term 'over-invoicing', adding that the word had been repeatedly used earlier in the IPP saga also. Senator Kamran Murtaza rightly criticised the SBP for imposing a mere Pak Rs. 1.4 billion in penalties on banks, while the banks had walked away with a huge profit of PKR 65 billion. As is the norm, when the SBP imposed a 10% foreign exchange income tax last year, the banks took the matter to court and remains is sub-judice.

The case of funds being misappropriated by vested interests is not new to Pakistan. The tragedy is that two years after the heist of PKR 65 billion, there is a wake-up call! The loss to the exchequer and nation is symptomatic of the larger malaise afflicting Pakistan today. With the economy on the downspin, announcing another IMF package is knowledge of a stop-gap relief. For reasons best known to Pakistan, over-invoicing continues to this day without any authority making a song and dance about it. Recall that in the 1980s, it was 'under-invoicing' that provided profits from the trade in narcotics to Pakistan. Knowing the Pakistani system, the financial mismanagement of the economy will persist, leaving the common man to suffer.

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