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Looking Forward with Hope

The Annual Report of the State Bank of Pakistan for the financial year 1986-87 examines a number of imponderables, drawing attention particularly to the malaise in the economy because of weaknesses in financial and planning policy of the Government. Despite adverse weather conditions, a higher growth rate of 7 percent was achieved but with no significant remedies for structural weaknesses such as deterioration in public finances and the balance of payment situation, with the Government forced to resource to bank borrowing for budgetary support, particularly in view of the adverse public reaction to the initial annual budget. The significant achievement of the State Bank Report was that it was candid and gave a lucid summary of the ills pervading the body economic. Congratulations are in order to the authors of the Report for expressing with candour for the first time the deep need to restructure the basis for economic planning. It is a clear signal to others involved in the business of statistics that the business of Government is apt to suffer if perceived through rose-tinted glasses.

Statistics seldom fail to confuse the masses and are usually trotted out by an errant bureaucracy as a means of stifling intelligent opposition. Since the agencies that gather statistics do not have adequate resources, therefore most of the data is either wishful thinking or outright deceit. It is not possible to run sane Government on this basis and the first business of anyone assuming power should be to organise data collection as a superior service, no pun intended. With the advent of computers, data collection and storage becomes much easier. It must be understood that the presentation for various projects contains many inaccuracies tilted in a manner which would favour a particular idea or an organisation. Since these presentations are based on data collected, the data is usually doctored accordingly. Most of our development projects suffer a great deal in this manner, the presentations becoming more of a movie production, designed to project a particular line, an advertisement really instead of an impartial analysis of the best possible course. In the words of Thorstein Veblen, “Invention is the mother of necessity”.

A major effort is being mounted by the present government to mobilise local resources for establishment of new industrial ventures, balancing and modernisation of existing facilities and their expansion thereof. With the black economy threatening to overwhelm the regular one, our planners are perforce looking at fiscal models which would resource funds from hidden corners and bring them into the mainstream of Pakistan’s economic life. At this point of time there are two economies, the black is contributing to the well-being of the white economy without any noteworthy subscription to the national exchequer. In a nation of 100 million people there are less than one million tax-payers, the real collection being derived from indirect revenues such as sales taxes, customs duties etc, almost as high as 40-45 percent of the total revenue receipts. One of the fiscal models available to the government to coerce hidden income into the economic mainstream is to establish investment banks in the private sector. As already well-known in Pakistan, investment companies have proved to be high-risk institutions with a reputation of running off with the hard earned savings of millions of low and middle income groups mesmerised by the claims of unheard of returns on investment. Even now, the State Bank of Pakistan is fighting a losing battle against deceptively garbed investment institutions operating without official sanction and offering everything else but the moon to potential investors. Most of these so-called investment companies have an invisible sign over their thresholds which says, “a fool and his money are easily parted !!’’

Inviting applications for investment banks in the private sector, the Government is now in the process of assessing suitable investors among the 40 or so who have applied. These can be broadly divided into 4 categories, those with (1) financial clout (2) political clout (3) financial and political clout and (4) professionals. In the financial clout category are those who have finances but are not allied in any manner to the present Government. In certain respects however they have major clout in the administration, having had bureaucracy as their associates or in their pockets for the least 3 decades. As regards those with political clout, the successful sponsors are likely to be self-explanatory and those generally regarded as the powerhouse for the 1990 (read 1988) elections, provided they can lay their hand on some finances. Those with financial and political clout should have no problem if their alliances are correctly selected but the fourth category comprising the professionals would have the roughest going if at all they are to be considered.

The Government of Pakistan decided to allow the formation of Investment Finance Companies by the private sector as the essential first step in developing the capital market infrastructure of Pakistan. The necessity of developing a capital market at the current stage of Pakistan’s economic development is critical. The flow of national savings into the productive sector remains negligible and the government will have to continue providing funding, both for infrastructure as well as industrialization while the capital in the hands of the general public will continue to be spent on current consumption. Pakistan has been suffering from a very low savings rate since its inception and one of the historical reasons put forward has been the consumption-oriented nature of our society. However, the absence of viable and attractive saving vehicles has also been to blame. While the Government of Pakistan has launched a number of savings schemes with somewhat rather attractive rate of returns and tax benefits, these schemes have not been entirely successful. One of the reasons for the lack of success has been that the rate of return on these schemes does not compare favourably with what investors have been able to get in real estate and other non-traditional avenues of investment. In order to fulfill the mandate given to them by the Government these companies will have to devise saving schemes and investment opportunities to take into account the entire risk-spectrum. From a zero risk opportunity for a pension-fund investor to an opportunity with very high risk/reward ratios for the high net worth individuals. In the word of Peter Drucker, “Capital formation is shifting from the entrepreneur who invests in the future to the pension trustee who invests in the past”.

One very important role of these companies will be as underwriters of government bonds and other debt and equity instruments of public and private sector corporations. In order to attract investment into these instruments from the general public these companies will also have to act as market-makers in most of these securities. The market making role of these companies will be one of critical importance in the development of the capital markets as until the investor is sure that he can sell his investment any time he wishes to do so, he will be reluctant to invest. But once assured of liquidity in his investment, he may even consider investing his short term surpluses, and this should become the educational process in developing a long-term saving habit. As the market- making role of these companies will be of prime importance, the government will have to give due consideration to the most important and critical aspect of a capital market and that is the depth of the market, i.e. the number of participants in the market. The more the participants, the greater will be the liquidity and competition and greater will be the investors confidence in the market. It is, therefore, essential that the Government allow as many of these companies to be set up as there are qualified applicants. Because, if the permission to set up these companies also becomes an act of political patronage like sugar or cement factories then not only will this experiment fail but Pakistan will not be able to develop an adequate and efficient capital market, something which is very essential in the current phase of our economic development.

With the element of competition inherent in “the more the merrier” syndrome, these investment banks will have to really hustle for their existence and slowly but surely some will fall by the wayside for lack of quality in their services. Fair competition should be the name of the game and it must be allowed so that “a hundred flowers can really bloom”. While going for the investors confidence, the investment banks/companies will have to cater for profitability to survive as “profitability is the sovereign criterion of enterprise”, again Peter Drucker. The Government will have to take the risk of a few companies failing while the stronger, viable ones survive. It is essential, therefore, that the Government gives maximum number of sanctions for opening up of new investment companies leaving the ultimate selection to the investors confidence in the abilities of the companies to provide adequate returns. In a sense it means letting the private sector free to assume its own level. If such a thing can be done in Pakistan, there is a reason to look forward with hope.

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This articles shows the farsightedness in your work. Well written and thought out!

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