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Foreign Exhange Reserves

Budget Season is On

n a recent Seminar Mr. Ishaq Dar put Mr. Shaukat Aziz and Dr Ishrat Hussain on the mat about the state of the economy by questioning the policies of the government as well as the statistics given out by the regime. A little more than three years ago, as the Finance Minister of Pakistan, he was engaged in implementing the same policies that every government has been following in fits and starts for the last ten years, the thrust of the airing of statistics was similarly positive. Giving US and Japan as example, Dar said if they had been reducing the budget deficit and debt the way the present regime was doing they would never have prospered. The US had the highest budget deficit in the world and was the largest borrower but still had the strongest economy in the world by far.
The dissemination of “positive” financial information depends upon who is in power, with control over the State media to propagate the “gospel truth”. I personally respect Dar for his integrity (if not his politics of misrouted passion), and agree that macro-political stability is more crucial than economic growth. Addressing the prime bankers of the country, Prime Minister Mir Zafarullah Khan Jamali also agreed in principle as any head of government with a sane head would do. The problem is that politicians as public officials rarely practice what they preach when out of power. Dr Ishrat Hussain, Governor State Bank of Pakistan (SBP), maintains that the culture of “thana, kutchery and tehsil” is sapping the vitality and energy of the nation. The SBP Governor should set an example in self-accountability by making public the statistics of the last five hundred appointments where SBP had either a direct or indirect role to play. SBP selections and appointments would then be tested on a “nepotism, sifarish and corruption” scale. The choice on merit, and merit alone, could act as a role model.
The primary responsibility of the State Bank of Pakistan (SBP) like any Central Bank is to control monetary policy and ensure soundness of financial systems, being provided by regulation and supervision. SBP must promote price stability in the context of micro-economic stability and growth, besides addressing as one of the policy-makers the micro imbalances in the economy which are (1) fiscal deficit (2) balance of payment deficit (3) saving and investment imbalance and (4) unsustainably high rate of increase in prices. SBP Reports tend to be full of data that take away the focus from SBP’s aim, the Reports should concentrate on SBP’s view of micro-economic imbalances and how these can be addressed and reduced, to be made sustainable at a manageable level i.e. fiscal deficit, inflation and balance of payment deficit should be workable and viable. There is no sense for the SBP Report to go out of this framework. The suspicion arises, why this window dressing on an otherwise credible report?
Within this framework we have, viz (1) monetary policy (2) exchange rate policy and (3) promotion of the health of the financial system, financial institutions and financial markets as the primary concerns of the SBP. In its Report the SBP talks only of monetary policy and of other areas but has made major omissions, e.g. the Report does not mention anything about the soundness of the financial system, for instance nothing is told about the outcome of supervision of financial system. The SBP should come out with an Annual and Half-yearly report on the state of affairs in the banking sector exclusively, namely the performance of banks, the quality of regulations, the result of supervision and the future course of the banking industry. This area has been completely neglected by SBP and the emphasis has all along been on micro-economic framework, which again has been combined with excessive data on the areas not directly concerned with the SBP. In the area of monetary policy not much homework seems to have been done. The recent sharp decline in discount rate may have benefited the government in terms of ridiculously low interest on T-bills but it has adversely affected three areas i.e. (1) profitability of SBP (2) of commercial banks and most of all (3) rate of return on deposits. In real terms the rate of return on bank deposits is going to be negative. There is thus a question mark on the advisability of the monetary policy.
It is the Finance Minister’s unenviable job to present the next budget in a Parliament in which a vocal minority is outrightly hostile, he will need a thick skin and a loud voice to keep reading the budget while being drowned out by catcalls of “LFO no, MUSHARRAF go”, i.e. if the present government-opposition parleys are stillborn. To his credit Shaukat Aziz insists that he will ensure availability of credit to business on low rates while removing the irritants faced by them on non-tax matters. That will take some doing. Presently there does not appear to be any serious conflict between various policies, balance of payments is not only viable but we have very comfortable level of Foreign Exchange (FE) Reserves, however this is not the result of present policies but largely of external factors after 9/11 and the policy initiated by former Governor SBP, Dr Mohammad Yaqub, of purchasing FE in the open market. The Rupee counterpart of the re-scheduled debt running to nearly Rs.300 billion has also been used for the improvement of government finances, this means that both the FE and Rupee liabilities have been deferred i.e. the present regime is taking the advantage, subsequent or later regimes/generations will bear the burden, “fly today, pay later!”.
A great deal is being made of the improvement of economic indicators; this is true to the extent of increase of FE reserves. The external sector has become strong as well as viable as a result of four major developments, namely (1) improvement in trade balance (2) benefit of re-schedulement of debt as well as direct assistance following the 9/11 incident (3) impressive increase in home remittances from about US$ 1 billion (2000-2001) to over US$2.4 billion (2001-2002), projecting US$ 4 billion (2002-2003) and (4) finally purchases from market. This has resulted in disappearance of the black market, unification of exchange rates and above all the US Dollar is no longer an alternative asset as it was during the period of FE accounts. One must also note that visibly the external sector has been liberalised. However if we look at such crucial indicators as growth rate in population, rate of national savings stagnating at 13%, increase in percentage of population below the poverty line rising from 29% to 35%, as well as the rising indicators of unemployment, these are not happy indicators. We must be concerned not only with the soundness of an economy over mid and long-term but are factors directly concerned with human welfare.
Mr. Arif Nizami has pointed out in a recent Seminar that the country has had to pay a heavy price to the international financial institutions for the reforms enacted. The Nation’s Editor correctly maintains that the country was on the brink of default and it is necessary to put spending money in the consumer’s pocket to jump-start the economy, to have the courage to do it sooner rather than later. The point arises, do our public officials, both politicians and bureaucrats, have the courage to recognize their failures in human resources management and inconsistent extraneous policies even as they build material resources for the State? Or are they simply engaged in making this nation wealthy at the cost of beggaring the nation’s population?

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