Pakistan’s BOP Blues: Demons in the Debit Side—An Elitist Analysis of the Outward Remittance Regime—Bringing the Tax Pincer Back In

Abstract

The paper seminally develops (in some respects, reinforces) an alternative analytical framework of foreign exchange management in a developing country context in which, along with the standard toolkit of foreign exchange regulations, the tax system also plays a pivotal role. The paper spatially anchors itself in Pakistan to make an attempt to fill the knowledge gap, which, inter alia, emanates from an excessive focus on increasing inward remittances through exports, foreign direct investment, and workers’ transfers, and an equal absence of attention on decreasing outward remittances on account of imports, commercial imports, travels, private transfers and insurance. It is argued that outward remittances can be better checked by bringing in the tax pincer to operate on the exit-gate side by side with the foreign exchange regulations. In order to operationalize the proposed mechanism, an elaborate set of cardinal questions are devised that must be answered by the remitting state’s institutional network before out-remitting any chunk of foreign exchange—big or small. It follows that no institution of whatever weight, size or strength can answer all of the questions on its own on standalone basis; instead different questions would have to be answered by different institutions (and their underlying enforcement outfits) to achieve desired aggregate outcomes and impact. A suitable theoretical framework is laid out and expanded to develop the concept of rentier state elite who, with ingrained centrifugal economic propensities, constantly try to funnel foreign exchange out of the economy and park it in foreign jurisdictions. It is contended that the rentier state elite keep the foreign exchange policy regime porous and its enforcement outfits incapacitated so as to ensure selective and patchy application of various regulations particularly the foreign exchange rules and tax laws. The dynamic causal mechanisms are traced between the rentier state elite and the systemic aberrations, and are galvanized through empirically-based reasoning culminating into a case study. The tax nexus insufficiency established through critical survey of the tax system and its coupling with the foreign exchange regulations is brought out as the key take-home, which then connects back to Pakistan’s perennial BOP blues. The analytical framework developed, it is posited, is generalizable to other similarly-circumstanced national economies that are constantly facing BOP problems.