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Discuss ECONOMIC IMPACT OF HAWALA within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; ECONOMIC IMPACT OF HAWALA Despite its informality, the hawala system has direct and indirect macro-economic implications— for financial activity as ...



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Sunanda K. Chavan
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ECONOMIC IMPACT OF HAWALA - October 11th, 2010


Despite its informality, the hawala system has direct and indirect macro-economic implications— for financial activity as well as for fiscal performance.
One aspect is its potential impact on the monetary accounts of countries on either end of the hawala transaction.

Because these transactions are not reflected in official statistics, the remittance of funds from one country to another is not recorded as an increase in the recipient country's foreign assets or in the remitting country's liabilities, unlike funds transferred through the formal sector. As a consequence, value changes hands, but broad money is unaltered. However, hawala transactions may affect the composition of broad money in a recipient country.

In the remittance business, such transactions are conducted mainly in cash, even though hawaladars may use the banking system for other purposes. Individuals from developing countries who transfer funds abroad through the hawala system for investment or other purposes are usually members of wealthy groups.

They supply local hawaladars with cash by making withdrawals from their bank accounts. As a consequence, hawala-type transactions tend to increase the amount of cash in circulation.

Furthermore, IFT (Informal funds transfer) systems have fiscal implications for both remitting and receiving countries because no direct or indirect tax is paid on hawala transactions.

The negative impact on government revenue applies equally to both legitimate and illegitimate activities that involve the hawala system.

Hawala transactions cannot be reliably quantified because records are virtually inaccessible, especially for statistical or balance of payments purposes. This holds true for both the remitting and, especially, the receiving sides of the transactions.

Hawala transactions from developing countries are sometimes driven by capital flight motivations; they may also be driven by a desire to circumvent exchange control regulations and the like, leaving no traceable records.

Nevertheless, the authorities of some countries have sporadically made estimates of hawala activity based on their expatriate populations and balance of payments data.

In any case, all crude estimates should take into account both hawala and reverse hawala transactions (see box) as well as transactions driven by illicit activities.

Although it would be impossible to provide a precise figure, the amounts involved in hawala transactions are likely to entail billions of dollars.

Regarding the economic impact of hawala, above all, there are two aspects.

1. One is the macroeconomic effect it has on individual economies and state sovereignty.

For example, according to Pakistan estimates amounts reaching the equivalent of billions of US dollars are channeled past the country's tax authorities in this way every year. In India, there are estimates that, although forbidden, up to 50 % of the economy uses the hawala system for moving funds.

2. Another aspect is the impact on international financial markets, financial regulation and monetary policy. In principle, informal money transfer systems tend to reduce the effectiveness of traditional instruments of monetary policy in making it more difficult to judge the need for money balances in an economy and the reactions to changes in rates and prices.

Beside, they hamper the supervision of money and capital flows and the fight against risky or illegal financial practices. This is the reason why, for example, the Financial Action Task Force (FATF) and the Asia/Pacific Group on Money Laundering (APG) pay close attention to the system.

On the other hand, there are two aspects which help to put in perspective the importance of hawala:

1. First, with an estimated annual volume of $200bn it is a rather minor phenomenon amid the vast amounts of cash flowing through the global markets each day.

For instance, average daily turnover in traditional foreign exchange markets world-wide is estimated at $1,210bn. Annual transaction values in the US CHIPS and Fedwire payment systems, the British CHAPS or the German EAF reach up to hundreds of trillion dollars.

2. Second considering the intranets used by large multinational firms operating world-wide, hawala is only one among many informal payment systems bypassing traditional banks.
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