Pakistan cooking it's economic books
Writing on the wall
When players in the financial sector opt in favour of acting merely as intermediaries diluting their vital role of giving business and industry a sense of direction by prioritizing investment in sectors that will ensure economic growth on a sustainable basis, it is time to act, more so, because displaying a sense of social responsibility is going out of fashion. The proof: record credit expansion without a commensurate rise in GDP
THE after-effects of over-exuberance are finally showing as key economic indicators flash red signals. For the present, the signals are weak but if brakes are not applied slowly, the economy could swerve on to a bumpy track.
The view is shared even by those who, until now, advocated rapid de-regulation, ‘freeing’ of markets and ‘rationalization’ of monetary and import policies.
With government borrowing overshooting its full-year target by over 28 per cent in six months, trade deficit at $6.5 billion and threatening to overshoot $10 billion by June, and core inflation up 7.5 per cent over its July 05 level, policymakers need to act to stop further over-heating of the economy. But it will take more than the usual ‘popular’ shifts in the policies.
When players in the financial sector opt in favour of acting merely as intermediaries diluting their immensely vital role of giving business and industry a sense of direction by prioritizing investment in sectors that will ensure economic growth on a sustainable basis, it is time to act, more so, because displaying a sense of social responsibility is going out of fashion. The proof: record credit expansion without a commensurate rise in GDP.
The problem escalated after 2002. Yet, we never saw a credible expression of what was claimed all along – tightening of the monetary policy. Glib-talking bankers dissuaded policy-makers from really tightening the policy because it would have squeezed the profits banks were booking by aggressively lending to all and sundry, realizing little that misallocation of resources would eventually over-heat the economy.
Current indicators, especially the demand-propelled inflationary rise, suggest that a large chunk of the enormous inflow of resources after 9/11 was not channelled into productive investment and many of the relaxations in import restrictions were ill-advised. It was amazing to see how (with oil price rise beating all past records) Pakistan, which never a BOP surplus in the past half a century, could keep the exchange rate of its currency virtually static.
The anomaly was pointed out time and again but policymakers didn’t budge from the stand they had taken although it amounted to subsidizing imports an enormous chunk of which formed non-essential consumables.
Contrary to the belief held by some regulators, in Pakistan, where the lure of short-term gains often takes the better of the business community’s senses, they had to play a more active role during the recent phase of de-regulation.
Regulators overlooked the fact that over-friendly regulation eventually weakens economies in vitally important areas. We now face such a situation. The imprudence of relaxing controls on import of consumables whose import utilized precious reserves generated by privatisation was pointed out, but to no avail. True, that WTO regime prohibits imposing direct controls on imports but timely adjustments in the exchange rate could have had the desirable restraining effect.
Pakistan now faces the highest ever trade deficit, while inflow of bulk of the privatisation proceeds (that were to contain this deficit) will take longer then envisaged. That being the case, we now hear of another floatation of dollar bonds, which will only restore the level of external debt back to its pre-2002 level.
How many errors of judgment we make in pricing the bonds this time, and what would be the eventual cost of rectifying them, is anybody’s guess given the track record of the first floatation. Rumour has it that pricing errors in the first bond issue are still being rectified.
Public sector borrowing propelled by fiscal deficit is a cause of concern but overshooting of the target wasn’t wholly the result of bad fiscal management. No one could predict the financing needs that surfaced in the wake of the October 8 earthquake.
But, to begin with, targeting the deficit at four per cent of the GDP was more a wish than a target. Pakistan is, in no way, comparable to the developed countries many of which are finding it hard to contain this deficit around four per cent of their GDP.
India ran this deficit close to 10 per cent of its GDP for several years but during those years it spent the borrowed resources carefully to build the infrastructure needed to put the country on road to progress.
On the contrary, we never spent enough to fill this gap because our policymakers remained focused on winning the meaningless trophies reserved for those who play number games – the focus of short-sighted corporate executives hired on contract.
Until recently, finding resources for funding the deficit was not a problem; it was the choice government exercised for funding it. In the last two years, the government kept borrowing from SBP against its T-Bills but didn’t allow SBP to monazite that debt, i.e. borrow from the banking sector.
As a consequence thereof, nearly Rs515 billion worth of public sector debt was funded by SBP, a large part thereof, perhaps, by printing new currency notes. At least, the soaring inflation conveys that impression.
Left with few choices, banks began consumer lending that has been fuelling demand. Presently, the situation is bad because bulk of the bank deposits (that could now fund increased public sector borrowing) were palmed to marginally productive high-risk borrowers.
Many of these borrowers opted for investing the loan funds in speculative transactions. The baffling rise in share and house prices and the advent of the “on-money”, are indicators there of.
The unprecedented amount of money circulating in the economy instead of being deployed in real investment also reflects the reality that most categories of bank deposits – the investment alternative – could earn only hefty negative real returns, courtesy the faulty FBS inflation estimates that no saver believed in.
Another major contributing factor was government refusal to borrow long-term from the banking sector. This short-termist attitude left surplus liquidity in the banking sector and also undermined the sentiment for saving; it encouraged consumption that kept fuelling inflation.
These trends must be reversed if the economy is to regain any semblance of rationality and stability. Developing the foresight to forestall such outcomes requires regulators to institutionalise a governance culture that tempers regulatory flare with vision that enables them to distinguish between economic and nominal returns.
There is ample evidence to suggest that in an environment of intense competition – the gift of ‘freeing’ the markets rapidly – market players don’t worry about low economic returns; they sometimes have to be goaded into doing so.
A continuing wide gulf between credit expansion and GDP growth reflects a cavalier attitude to financial regulation. The trend led to a scenario wherein scarce resources could not be retrieved from marginally productive investments for extended periods placing those economies under sever strains.
It is time regulators undertook a stiff qualitative assessment of banks’ asset portfolios and adjusted the rupee-dollar parity so that it doesn’t reflect a grossly over-valued Rupee.
Finally, the government must come out of its shopkeeper mould; its must create a credible environment for long-term planning by everyone. Its ill-advised back-office accountant approach would damage this environment for years to come. A developing country that has to build infrastructure in virtually every field can’t afford such experiments.
By A.B. Shahid
When players in the financial sector opt in favour of acting merely as intermediaries diluting their vital role of giving business and industry a sense of direction by prioritizing investment in sectors that will ensure economic growth on a sustainable basis, it is time to act, more so, because displaying a sense of social responsibility is going out of fashion. The proof: record credit expansion without a commensurate rise in GDP
THE after-effects of over-exuberance are finally showing as key economic indicators flash red signals. For the present, the signals are weak but if brakes are not applied slowly, the economy could swerve on to a bumpy track.
The view is shared even by those who, until now, advocated rapid de-regulation, ‘freeing’ of markets and ‘rationalization’ of monetary and import policies.
With government borrowing overshooting its full-year target by over 28 per cent in six months, trade deficit at $6.5 billion and threatening to overshoot $10 billion by June, and core inflation up 7.5 per cent over its July 05 level, policymakers need to act to stop further over-heating of the economy. But it will take more than the usual ‘popular’ shifts in the policies.
When players in the financial sector opt in favour of acting merely as intermediaries diluting their immensely vital role of giving business and industry a sense of direction by prioritizing investment in sectors that will ensure economic growth on a sustainable basis, it is time to act, more so, because displaying a sense of social responsibility is going out of fashion. The proof: record credit expansion without a commensurate rise in GDP.
The problem escalated after 2002. Yet, we never saw a credible expression of what was claimed all along – tightening of the monetary policy. Glib-talking bankers dissuaded policy-makers from really tightening the policy because it would have squeezed the profits banks were booking by aggressively lending to all and sundry, realizing little that misallocation of resources would eventually over-heat the economy.
Current indicators, especially the demand-propelled inflationary rise, suggest that a large chunk of the enormous inflow of resources after 9/11 was not channelled into productive investment and many of the relaxations in import restrictions were ill-advised. It was amazing to see how (with oil price rise beating all past records) Pakistan, which never a BOP surplus in the past half a century, could keep the exchange rate of its currency virtually static.
The anomaly was pointed out time and again but policymakers didn’t budge from the stand they had taken although it amounted to subsidizing imports an enormous chunk of which formed non-essential consumables.
Contrary to the belief held by some regulators, in Pakistan, where the lure of short-term gains often takes the better of the business community’s senses, they had to play a more active role during the recent phase of de-regulation.
Regulators overlooked the fact that over-friendly regulation eventually weakens economies in vitally important areas. We now face such a situation. The imprudence of relaxing controls on import of consumables whose import utilized precious reserves generated by privatisation was pointed out, but to no avail. True, that WTO regime prohibits imposing direct controls on imports but timely adjustments in the exchange rate could have had the desirable restraining effect.
Pakistan now faces the highest ever trade deficit, while inflow of bulk of the privatisation proceeds (that were to contain this deficit) will take longer then envisaged. That being the case, we now hear of another floatation of dollar bonds, which will only restore the level of external debt back to its pre-2002 level.
How many errors of judgment we make in pricing the bonds this time, and what would be the eventual cost of rectifying them, is anybody’s guess given the track record of the first floatation. Rumour has it that pricing errors in the first bond issue are still being rectified.
Public sector borrowing propelled by fiscal deficit is a cause of concern but overshooting of the target wasn’t wholly the result of bad fiscal management. No one could predict the financing needs that surfaced in the wake of the October 8 earthquake.
But, to begin with, targeting the deficit at four per cent of the GDP was more a wish than a target. Pakistan is, in no way, comparable to the developed countries many of which are finding it hard to contain this deficit around four per cent of their GDP.
India ran this deficit close to 10 per cent of its GDP for several years but during those years it spent the borrowed resources carefully to build the infrastructure needed to put the country on road to progress.
On the contrary, we never spent enough to fill this gap because our policymakers remained focused on winning the meaningless trophies reserved for those who play number games – the focus of short-sighted corporate executives hired on contract.
Until recently, finding resources for funding the deficit was not a problem; it was the choice government exercised for funding it. In the last two years, the government kept borrowing from SBP against its T-Bills but didn’t allow SBP to monazite that debt, i.e. borrow from the banking sector.
As a consequence thereof, nearly Rs515 billion worth of public sector debt was funded by SBP, a large part thereof, perhaps, by printing new currency notes. At least, the soaring inflation conveys that impression.
Left with few choices, banks began consumer lending that has been fuelling demand. Presently, the situation is bad because bulk of the bank deposits (that could now fund increased public sector borrowing) were palmed to marginally productive high-risk borrowers.
Many of these borrowers opted for investing the loan funds in speculative transactions. The baffling rise in share and house prices and the advent of the “on-money”, are indicators there of.
The unprecedented amount of money circulating in the economy instead of being deployed in real investment also reflects the reality that most categories of bank deposits – the investment alternative – could earn only hefty negative real returns, courtesy the faulty FBS inflation estimates that no saver believed in.
Another major contributing factor was government refusal to borrow long-term from the banking sector. This short-termist attitude left surplus liquidity in the banking sector and also undermined the sentiment for saving; it encouraged consumption that kept fuelling inflation.
These trends must be reversed if the economy is to regain any semblance of rationality and stability. Developing the foresight to forestall such outcomes requires regulators to institutionalise a governance culture that tempers regulatory flare with vision that enables them to distinguish between economic and nominal returns.
There is ample evidence to suggest that in an environment of intense competition – the gift of ‘freeing’ the markets rapidly – market players don’t worry about low economic returns; they sometimes have to be goaded into doing so.
A continuing wide gulf between credit expansion and GDP growth reflects a cavalier attitude to financial regulation. The trend led to a scenario wherein scarce resources could not be retrieved from marginally productive investments for extended periods placing those economies under sever strains.
It is time regulators undertook a stiff qualitative assessment of banks’ asset portfolios and adjusted the rupee-dollar parity so that it doesn’t reflect a grossly over-valued Rupee.
Finally, the government must come out of its shopkeeper mould; its must create a credible environment for long-term planning by everyone. Its ill-advised back-office accountant approach would damage this environment for years to come. A developing country that has to build infrastructure in virtually every field can’t afford such experiments.
posted by India News Watch at 6:34 AM
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