Why do Pakistan’s elite park their $500 billion wealth abroad

According to several estimates, the collective wealth of Pakistanis hidden overseas in offshore companies and tax havens is around $350-$500 billion. Of this, around $250-$300 billion is said to be in Switzerland, and nearly $100 billion in the UAE according to some observers.

Currently, GDP of the country, projected by the World Bank, is around $304bn. If an enabling environment is created to facilitate reversal of flight of capital– both formal and informal, it could become a stabilizing factor for the forward-base of an emerging economy carrying mixed-bag of loans and investments related to CPEC and its upcoming downstream projects.

But Pakistan’s business elite fears that Panama/Paradise leaks may further polarize the society across class divide and pollute the business environment– an unavoidable reaction no matter how muted it may emerge and one has to take it with a grain of salt.

Therefore, according to a Dawn report, future strategy, businessmen said, should be to suppress the temptation of a witch-hunt. “Blaming and shaming should be a side business. The focus needs to be on opening channels and creating an environment where offshore account holders find repatriation of their wealth back in Pakistan to be the most economically viable option,” a businessman said.

They detested projecting all offshore account holders as scoundrels. They stressed upon the need for evolving some mechanism to distinguish fair operators from foul. The private sector and its sympathizers regretted the country’s environment that forced people to shift their assets overseas.

Underplaying the astonishing volume of asset transfer and the income disparity dimension in Pakistan, free market advocates insisted that the real culprits were government’s unstable policies, the corruption/inefficiency of the tax machinery and the precarious security situation. However, many told PKonweb in background interviews that it’s the total lack of the rule of law supremacy for which a broader malaise has been responsible. Some called it the “growing pains” of an “emerging society” still undergoing a “melting pot” cycle.

“Multiple factors combined to force the law-abiding elite to park wealth abroad. Who can feel safe in a country where sons of the prime minister, governor and generals get kidnapped? The sour memory of nationalization is not forgotten. Why should we trust the leadership? The Federal Board of Revenue is lazy and corrupt, why should we pay for their inefficiency? The circumstances force high-net-worth Pakistanis to keep their wealth in tax havens in anonymous accounts,” a corporate lawyer from Lahore argued, according to the report.

However, a former chairman of the FBR dismissed the businessmen’s plea as baseless justification for flouting laws. “How can they be allowed to blame their misconduct on anything but weakness of their character and their insatiable thirst to amass riches?” he questioned.

According to one observer, “two wrongs don’t make one right.”

“The offshore investors clearly have more wealth than they and their children can spend in a lifetime, but it is not enough for them. It beats demands of logic. There is no defense for greediness,” added former FBR chairman.

Chief Economist Dr Nadeem Javed did not see an issue if transparency could be ensured. “We are for free flow of resources for optimal returns. As long as people see a comparative advantage they will be inclined to transfer their wealth to options that promise the best returns. It doesn’t mean indemnity from law. Within legal boundaries, everyone, rich and poor, should have the right of choice,” he said.

That’s where the nugget of “supremacy of rule of law” normally kicks in but was bent, distorted and this enabled wrongly intended business activities at the cost of the country. Over two decades, special laws were made to enable two-way flight of capital but these had loopholes that served as donuts for money-laundering, illicit business activities, etc.,” said one observer.

As much as the private sector dismissed it there is little denying the fact that Pakistan is perceived to be a poor country with an astonishingly rich elite. The leaks of offshore accounts of Pakistani individuals and companies did highlight the anomaly. It also exposed the nexus between law firms and financial institutions and a web of complex transactions, all shrouded in mystery.

“The work of the journalist body is commendable in terms of providing actionable evidence to suspected wrongdoings of the rich and famous but I fail to see the element of surprise,” an aspiring economist said, attributing low-caliber debate around leaks in Pakistan to financial illiteracy. “Banks are not just about storage. Obfuscating wealth through a maze of tool is also one of its functions in today’s world. Actually, tax avoidance is the new elite sport.”

So far the Panama and the Paradise lists include 643 Pakistanis, 450 in Panama Papers and 193 in Paradise Papers. They are estimated to own as much as five per cent of the total hidden $10 trillion global wealth. That’s a whopping $500 billion– it’s more than one-and-a-half times the country’s GDP.

Since offshore accounts are operative at a place where Pakistan’s regulations are not applicable, individuals and companies can route and reroute money (profits, assets) to take advantage of lower or zero taxes abroad.

The volume of monies stashed abroad is humongous, entailing a very high opportunity cost in terms of loss of investible funds in Pakistan– a country struggling with low investment-to-GDP ratio and very low tax-to-GDP ratio. Therefore, the burden of tax avoidance of rich in an expanding economy is borne by the poor and salaried class. “The government functions have to be financed. The government recovers what they lose from the rich and the corporations by squeezing the vulnerable multitude through indirect taxation,” commented an economist.

According to media reports, Panama and the second list (Paradise Papers) include names of politicians, businessmen, bankers, brokers, realtors, doctors, lawyers, management hierarchy, bureaucrats, and senior military men. Does this practice serve the Pakistani elite only? No. But with globalization having become the new normal, a smooth playing field is emerging much to the discomfort of this class.

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