Non-filers are likely to ditch the Rupee in favour of other commodities. The Federal Board of Revenue (FBR) has tightened its grip on non-filers by restricting their bank transactions, stock market activity, and real estate dealings. It is, thus, surely possible that many non-filers are seeking respite from the FBR’s eye in the forex or gold markets – where the gold market is currently riding a strong wave of investor confidence.
But what does this mean, and who stands to benefit?
Non-filers may now want to shift their financial holdings to assets that can not be audited by the FBR now that the financial capital is withdrawn from taxable sectors like the stock market, real estate, and banking.
Pakistan is likely to see a surge in the local prices of these commodities, with a higher demand following the increase in the flow of funds into gold and forex markets.
This means that the increased demand from non-filers could trigger upward pressure on the local gold and forex prices. The gold rates are already hitting record highs of around PKR 280,000 per tola, and the rupee is barely holding its own against the greenback — a result of import controls and the crackdown on smuggling across the Afghan-Pakistan border.
If government authorities fail to address this trend, we may see a sharp decline in productivity, as capital is pulled from productive sectors like the stock market and redirected towards unproductive investments in gold.
This is because while money in the stock market is used to produce other goods and services in the economy, gold does not have any productive value other than the mere speculative value investors assign to it – especially in times of economic uncertainty.
What’s more unsettling is that non-filers with large amounts of cash and other assets stashed away are likely to emigrate as the metaphorical noose tightens around the financial freedoms that non-filers previously enjoyed.
Investor Visas, such as the Portuguese golden visa, are gaining traction and garnering interest in non-filer social circles despite costing the visa applicants a staggering half a million Euros. An emigration of this financially elevated class of the population is likely to result in immense levels of capital flight as non-filers may seek out more favorable destinations for their wealth.
As for the PKR, the rapid conversion of rupees into foreign currencies will result in strong depreciatory pressures as, historically, the State Bank of Pakistan (SBP) tends to hold the PKR in a loose peg with the USD.
What this means for the SBP is that as non-filers rapidly exchange their PKR for foreign currencies, the SBP will have to step in with contractionary open market operations. This entails selling liquid USD reserves that the SBP has in exchange for PKR to stabilise the value of the PKR and hold the loose peg.
This, however, depletes foreign reserves held by the SBP and opens up the PKR to further speculative attacks from investors who feel that the SBP might not have enough reserves to hold the peg for longer. It is possible as the SBP holds a meagre $9.4 billion, which is not enough to sustain a long-term currency manipulation scheme, in the event of a speculative attack on the PKR.
With the grim economic consequences of the crusade against non-filers in mind, a question arises: To what extent will the measures of the government serve to curb the tax evasion problem?
The answer: Time.
