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Five Minutes to Midnight

The Punjab CM, Mr Shahbaz Sharif, and the Federal Finance Minister, Senator Sartaj Aziz, air-dashed to Abu Dhabi and Saudi Arabia this week in a desperate effort to get funds so as to keep the country from defaulting. The Nawaz Sharif regime inherited US $ 300 million only in foreign exchange reserves in early 1997 but had raised them to US$ 1.3 billion in about 18 months, the imposition of emergency on May 28 and the deep freeze of all foreign currency accounts changed all that. In the face of sanctions a temporary measure could have been overlooked by the investing public but when it became apparent that the Government was dead serious in wanting to Rupee-fy the deposited US dollars at the official rate, the public confidence rapidly eroded. Since then a rather erratic course has been followed with disastrous consequences.

Pakistan’s economy is based primarily on parallel flows, the formal sector needs a consistent flow of inward remittances even at the best of times, the imposition of sanctions has created both physical and psychological blocks making it the worst of times. The stoppage of inward flow is also matched with exorbitant outflows in the informal sector making not only our economic situation critical, but making dependence on IMF and World Bank installments of life-saving importance for this country. This support has a sovereign price to it, for nations with any pride this becomes a difficult proposition. The only option available is to restore the confidence of those who had deposited money in Pakistan. Knowing that we do not have enough US dollars to pay the depositors we have to bite the bullet and go the radical route.

A clear-cut policy pronouncement is necessary, anyone wanting to take out foreign exchange from his/her foreign exchange accounts should be allowed to do so in Pakistani Rupees at the prevailing kerb market rate. Today the depositor feels he or she has been shortchanged/looted by the Government of Pakistan (GoP) and only a policy that will allow him (or her) to take out all his/her money and change it on the same day from the money lenders so as not to lose in the exchange will suffice to overcome this perception. Instead of inflicting punishment by giving depositors pre-May 28 the official rate far below the kerb rate, let us reward them instead, after all we invited them with open arms to open foreign currency accounts pre-May 28. Does the PM know that a very large group of depositors are salaried class and housewives who were investing in savings in US Dollars as a hedge against inflation? Why not encourage them to keep doing so? If the person keeps the foreign exchange funds in his/her account as was the balance prevailing on May 28, as an incremental to that balance he/she should get an incentive of 5% mark-up in Rupees in addition to the normal mark-up prevailing. For a housewife or salaried person having an average of US$ 10000 deposit, this would mean an additional Rs.2500-3000 every month. Expatriate Pakistani bank accounts must be unfrozen and allowed free transactions. They could have invested abroad but they brought their money here, should we give them the feeling we are looting them? Those opening new bank accounts abroad in any Pakistani commercial bank abroad should get a parallel bank account in any Pakistani commercial bank of their choice and location in Pakistan with the proviso that the person is able to draw against his/her account in US dollars either within the country or abroad, that will be a powerful guarantee of protection of his/her hard earned money. We need money in our External Accounts to support Letters of Credit, this will give us the necessary funds. Persons earning blue collar/white collar wages and opening such account should be given a “Wage Earners Card” based on his/her employers certificate that gives the level of his salary and also allows him to send money to his kith and kin at home at the kerb rate of the day plus bonus incentives in customs duty drawbacks on personal baggage based on his/her remittances, with payment to be delivered to the home of the sender in Pakistan within 3 hours. While IMF-oriented economists/technocrats will resist these proposals tooth and nail, the country is more important than their international careers. Exporters must get their export proceeds in the form of Pakistani Rupees at the official rate and Bonus Vouchers amounting to the difference between the kerb rate and the official rate on the date of encashing documents. These Bonus Vouchers which can be traded can only be used to pay customs duties, excise duties, and sales taxes. Coming to the most important aspect of the economy, we must de-Monetize the higher bank notes from the Rs 100 note upwards i.e leaving only Rs 50 as legal tender. We should encourage all transactions through banks, why should we support those who keep their money secretly at home or in secret hideaways, let them move their money around in wheelbarrows of Rs.50 notes. If we don’t act now, all Pakistanis will have to use wheelbarrows to take money to buy a loaf of bread.

What do we hope to achieve with our exchange relief package? FIRST, the depositors who had money in accounts pre-May 28 would get the float Pakistan Rupee rate and thus would not feel looted, rather because of enhanced mark-up would become somewhat of a privileged lot thus restoring their confidence, they may not even withdraw the money. SECOND, we are restoring the confidence in the credibility of Pakistan’s sovereign guarantees by imposing a self-restraint on future urges to “nationalise” foreign exchange. THIRD, a legal alternative to the Hundi System can be developed by being pragmatic in policy and implementation. FOURTH, we give a boost to our exports without affecting our imports but by having a Bonus Voucher Scheme and allowing trade in it, giving some incentive to the importer/manufacturer in respect of a mechanism to reduce duties by purchasing these Bonus Vouchers at less than the market rate. FIFTH and last by demonetizing we will take money away from smugglers, blackmarketeers, hoarders, militant groups, etc, all those who benefit from keeping money out of the banking system. This may eliminate as much as Rs.300 billion from the system, thereby drastically bringing down inflation and even the rate of exchange. The State Bank estimates we may have to pay out between Rs 50-70 billion for the exchange relief scheme, with demonetisation we will have a healthy surplus left over.

This is a direct incentive-oriented approach to attract our expatriates to send money through the official system. The net effect of a positive pragmatic policy will be to bring the difference between the official and kerb rate to a minimum, not more than 8-9%. The unofficial system devalues the Rupee anyway without commensurate benefits to the country, why not make it official to our benefit? Once we have a credible system with built-in transparent guarantees in place, an appeal to patriotism will see Pakistanis abroad to respond. Like a bunch of ghouls and grave-diggers, senior executives of the Private Banking Divisions from many of the international banks have descended upon Pakistan, roaming around with their briefcases, encouraging the affluent to put their money in External Accounts as a potential escape route. And people are being tempted, that is one reason for the high kerb rate! Every US Dollar sent abroad means less money in investment within Pakistan, in time we will be denuded. We must appeal to our people not to fall prey to their temptations, let us give them some incentives to do so. Instead of saving themselves let us together save this country. In supercession of everything else, Mian Nawaz Sharif has to concentrate on the economy, with Karachi a part of this exercise and following a close second in critical attention. One thing is certain, when his back is to the wall Mian Nawaz Sharif is a fighter. At long last he went outside his inner circle of friends and bureaucrats reaching out seriously to a group of economists, businessmen, bankers and industrialists, literally shutting this Economic Advisory Group (EAG) into a room in the PM’s House while tasking them to brain-trust and come up with workable economic solutions. By Thursday this week, white smoke was coming out of the chimney signifying that the group had come to some conclusions for implementation. Now comes the acid test, will the PM take control firmly in his hand and go with the suggestions? Or as is usual, will the establishment’s set of wise men shoot the proposals down. On his ability and will to go with private sector recommendations lies the nation’s economic — and the PM’s political — future. The PM is a sincere, well-meaning patriotic Pakistani who is simultaneously an incurable optimist. As any captain of an aircraft in trouble knows, to keep height and control he must shed excess baggage, some of his advisors must go if he is to survive. Mian Nawaz Sharif is seen to be guided by events and persons rather than giving the perception of being fully in control. More important than any amount of micro-measures is the perception of strong leadership and focussed decision-making. There is no room for vacillation in the facade of credibility and strength, leadership has to be decisive and based on correct assumptions. Decisions have to be option-oriented, to be able to compensate for consequences. It is macro-measure time, it is five minutes to midnight. Mian Nawaz Sharif is capable of providing the quality of leadership required by the country but unfortunately he has had his chances and there is no more time left. Those of us who want he should remain at the helm of affairs should all exhort him, he must now deliver or it is “Titanic” time (without the music to go). While some of us may go down with him out of sheer loyalty, in the ultimate analysis the country is always far more important than any individual.

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