Following the Afpak money trail
It is worth repeating that beyond the strident headlines, there are structural economic drivers of societal and governmental change in Central Asia, including Pakistan, Afghanistan and India. It is a region with a history of almost constant conflict – an area shaped by the crucible of war and territorial dispute. Fighting a war, whether as a sovereign state, through state-sponsored terrorism, or even as a more informal insurgency, requires substantial level of funding. The requirements of war – arms, ammunition, supplies, foodstuffs, transport and on - can easily be found relatively cheaply and mainly illegally for these parties, but still require hard currency for purchase. Such economic wealth is not created by the fighters, who are not contributors to their community but rather financial drains. Further, in both Pakistan and Afghanistan, the economies are in crisis. The pursuit of foreign policy is also a regional priority.
Pakistan, for example, is functionally unable to support its fiscal requirements as a nation, is reliant on International Monetary Fund for foreign currency, and with an unemployment rate estimated to be in the region of 8.5%. In addition, Pakistan’s is producing in large numbers highly educated young people who face a bleak future of structurally-induced underemployment. Underemployment can be a major driver of social unrest. It can defined in a few ways. It can be the employment of workers with high skill levels in low-wage jobs such as a case of a doctor forced to drive a cab for economic survival . It can refer to “involuntary part-time” workers. These are workers who could (and would like to) work full-time but who can only find part-time work. In Pakistan and Afghanistan both, there is a lack of quality job opportunities, services such as childcare, reliable health care, public transportation, and in some areas freedom of movement due to security issues. Nor is the magnitude of these problems static, as the population continue to grow. Pakistan at the time of independence, had a population of only 32.5 million, but 116 million people were added during the last 50-60 year. This increase in the populace increases both demands for services, education and jobs – none of which are increasing their supply capacity at the same rate as the demand. So against this stark economics, the question has to be asked, where and how are the funds being found for the long term continuance of the insurgency and armed unrest in the region?
Much of the monies required to keep these countries afloat is found not in the official government data, but in the ‘black’ or underground economy. Most monies entering the region from external sources enters under the ‘hawala’ system. Regional researcher and journalist Shmuel Vaknin defines hawala thus, “Hawala” consists of transferring money (usually across borders and in order to avoid taxes or the need to bribe officials) without physical or electronic transfer of funds. Money changers (”Hawaladars”) receive cash in one country, no questions asked. Correspondent hawaladars in another country dispense an identical amount (minus minimal fees and commissions) to a recipient or, less often, to a bank account. E-mail, or letter (”Hundi”) carrying couriers are used to convey the necessary information (the amount of money, the date it has to be paid on) between Hawaladars. The sender provides the recipient with code words (or numbers, for instance the serial numbers of currency notes), a digital encrypted message, or agreed signals (like handshakes), to be used to retrieve the money. Big Hawaladars use a chain of middlemen in cities around the globe.” Others have an interest in hawala and the potential for it to produce funds to support the drug trade and arms business. For example, Interpol has a detailed article describing hawala/ hundi which is entertaining and educational reading. It is entitled, “The Hawala alternative remittance system and its role in money laundering”.
Hawala is remarkably popular with the regions diaspora population, who use the system to send funds back to their homeland, for familial, charitable, or more nefarious reasons. According to a recent report on Pakistan’s Geo TV Channel, Dr. Mughal, President of Pakistan Economy Watch, was quoted as saying he believes the reason behind thriving hawala business is inefficiency, exorbitant charges and delayed deliveries by banking service. It is also a much more private system than banking that requires reporting and detailed foreign currency controls. “The system of hawaladars is faster then any bank; it guarantee anonymity and would never involve paper work like identification and account opening,” Mughal said. “The unproblematic structure of this business suits best for a country where undocumented economy is believed to be almost equal to the documented one, he added. “Apart from reliability, speed and cost effectiveness, it dodges the exchange and tax regulations which is very attractive for people as a small would trust government,” he said and added that the hundi system is unaffected by international and regional scrutiny, political, economic or any other factor including global resolve to curb it at any cost.
The other challenge is accurately sizing such an unofficial payment system. Estimates vary by both country and by source, but the economic impact is massive. Researchers in Afghanistan say, in that country alone, in 2004-05 aggregate flows in and out of the hawala system were between $5.6 – $6.1 billion. The World Bank estimates 80-90% of the Afghan economy is underground. The Pakistan market is estimated to be even larger, with some analysts putting the annual hawala inflows from ex-pat Pakistanis as high as $7-10 billion per annum. But interestingly, where the West is focusing its current research on Hawala payments, and their role in funding the drug and weapon trades, is India. In a recent article in the Express India newspaper, it quoted a report on International Narcotics Control Strategy on the Indian hawala market. In discussing the report’s findings, Assistant US Secretary of State for International Narcotics and Law Enforcement Affairs, David T Johnson, said, “…the hawala market could amount to between USD 13 billion to USD 17 billion”. Given the large number of expatriates, India continues to retain its position as the leading recipient of remittances, according to the World Bank. From India these funds are distributed across the region. Some common sources of the proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion.
The economic challenge in the region is intense. The opportunity for the hawali systems to be abused by those intent in continuing the insurgency is very high. However, many use the hawala for much more innocent reasons. It is even used extensively by charitable and NGO’s to move money through the countries to fund human aid projects so as to avoid skimming and leakages through corruption and bribes. If the hawala system is not enough to be an enabler of regional insecurity, then there is also the ‘ushr’ (informal taxes levied by the Taliban on opium farmers) to factor in. It is estimated that ushr on opium production in Afghanistan will contribute $500 million to drug lords and the Taliban this year, a United Nations report says. So while the traditional economies of Pakistan and Afghanistan crumble, the illegal trades flourish and billions of dollars flow in and out via the hawala. It is a nightmare to monitor and police, and is prevalent in every major US and European country where ex-pat communities exist. If these illegal transactions could be forced into legal channels, the tax revenue, security gains and improvements for the national economies of the the target countries would be massive. However, hawala still flourishes despite the efforts of the West, and while the insurgents remain well funded, the countries that often involuntarily host them, do not.
