Private Capital Outflow from Pakistan

Abstract

An important and often ignored aspect of Pakistan's economy during the Seventies and the Eighties has been the high degree of mobility of domestic private capital despite the prevalence of explicit capital controls. In a foreign exchange constrained situation the capital outflow arising frOm increasing private claims abroad can have macroeconomic consequences leading to welfare loss through the reduction of domestic real investment, foreign exchange availability and a shrinking tax base, which result in the loss of potential growth. It is important to have some estimate of 'capital flight' in order to uncover the 'concealed' transactions in the balance of payments and to reveal the actual behaviour of institutional agents, since a part of the balance of payments difficulties are due to the deinand for foreign assets by the private sector channelled through unrecorded transactions. Because of their hidden nature these transactions have remained unrecorded in the official economic accounts and are consequently neglected. Thus, despite the importance of this phenomenon, often identified as 'capital flight', there have been few attempts to investigate the issue in Pakistan [with the exception of Khan and Haque (1987)]. The main reason for this being the difficulty in identifying 'capital flight' within the recorded balance of payments.