Oct 222008
 

HEY, Mr Government, desperate for some cash to save the banks? Here’s an idea: auction a few ministries.

Every man, woman and dog with money wants the trappings of power. They want the outriders, the phalanx of flashing lights, the sycophants, the army of hangers-on. Money certainly has its uses but it becomes a bit boring after the first three Prados. Serving the people without having to actually serve is the next step up our inverse-Maslowian hierarchy of needs.

Think about it. Shamshad Akhtar is injecting liquidity into the system like a junkie with the weight of the world on his shoulders. Shaukat ‘Over my dead body’ Tareen has spelled out plans A, B and C. And yet, walk into your neighbourhood bank and fear is still oozing from the walls.

So why not fling open the doors of the presidential palace and send out a clarion call across the nation, a ministry can be yours for the taking. The price: cold, hard cash deposited in local banks. They will come from far and wide, with sacks and trunks and bags and Prado boot-fuls of cash.

Pakistan’s banks have a problem: the rupee is a terribly unattractive store of value at the moment. It’s simple math really. If you save Rs100 in a bank in Pakistan today, you will get less than Rs115 a year from now. With inflation hovering around 25 per cent, what you buy for Rs100 today will cost you Rs125 a year from now. But your Rs100 will only be worth Rs115 by then. Economists call it a negative real rate of interest; in layman’s terms, it means you are punished for keeping your savings in rupees.

By itself, a negative rate of savings is not catastrophic to a banking system. What matters are the other available investment opportunities — and intangibles such as fear. This is where our banking system is being walloped. With the rupee sliding towards oblivion against the dollar, you could have earned more than the 25 per cent annual rate of inflation in 10 months had you bought Rs100 worth of dollars in January. And having being rebuffed by the US, China, Saudi Arabia and the Gulf countries, the incentive to dollarise your rupees has only grown stronger. Since July, Rs150bn has been withdrawn from the banking sector. It doesn’t take a genius to figure out that money has left these shores.

(Disclaimer: I have no investments or assets, here or abroad. The cash I do have is parked in one of those faux-savings accounts which never seem to earn a profit. I have done this because I am young, unmarried and have a reasonable expectation of a rising income path in the medium to long term. However, I have taken the short-term precaution of withdrawing a sum of cash equivalent to six weeks of living expenses, in case there is a systemic shortage of cash in the weeks ahead.)

The fact is no one — not China, not the US, not Saudi Arabia, not the Gulf countries, not the IFIs — trusts Pakistan to behave responsibly if handed a fistful of dollars. This is their cumulative judgment from their accumulated experience of dealing with us for decades. Our friends are pushing us into the death grip of the IMF because they believe it, and it alone, has the capacity and inclination to keep up with a slippery, profligate character like Pakistan. The IMF will demand that Pakistan live within its means by spending as close to much as it earns. Translated into numbers, it will mean cutting the fiscal deficit to four per cent or less; raising the tax-to-GDP ratio from 10 per cent to 15 per cent; and slashing growth targets to near-recessionary levels of four per cent or less.

For any government, most of all a newly elected, transitionary government beset by multiple crises, the IMF pill is a bitter one. It will slash development and current expenditure, dramatically reducing the government’s capacity to dole out patronage and employment. But it is the price our friends are demanding to ever so slightly open the cash spigot to douse an impending balance-of-payments crisis.

Before we curse them, we should ask ourselves, are they the only ones pessimistic about Pakistan’s ability to reform itself? Every time the head of a bank or ‘Over my dead body’ Tareen or a minister appears on TV to assure us all will be well, I can’t help but wonder if their bank statements of the past 12 months would tell another story. Show us your money, Pakistanis should say, and we’ll show you our trust.

We will emerge from this mess eventually. Perhaps as early as mid-2010 we may touch the bottom of the economic trough of low growth and high inflation. We have 170 million people who need to be fed and clothed and whose needs have to be met. We have a reasonable export base. Building a mobile telecom and TV news industry from scratch is indicative of the adaptability of the private sector. Our world will not end with this crisis.

The question is, will we finally learn our lesson from the balance-of-payments crises that afflict us every decade? The solutions are not Nobel-prize material. Go back to the basics: shore up the agrarian base of the economy; branch out into simple manufacturing; widen the tax net; expand our exports; get serious about institutional reform — basically do the dull and boring stuff that doesn’t grab headlines.

But we are attracted to bling, to shiny, quick growth inside a bubble. In an unstable political system with alternating bouts of military and civilian rule, it makes sense: when your policy timeline is uncertain and your political shelf life unknown, you go for the biggest, brightest, shiniest trinkets you can have. Better to dazzle than to go out with a whimper. But with every iteration of the cycle of boom and bust the problems are magnified, raising the question of how much longer can we go on.

This is not wanton doom and gloom. There is a genuine reason to question our leaders’ inclination to reform this country as long as they believe that Pakistan is too big to fail. It’s bandied about with distressing ease. Give us your money, we have nuclear weapons. And Al Qaeda. And the world’s seventh-largest standing army. And did we mention nuclear weapons?

How long before our friends think, well, maybe they shouldn’t have any of those?

cyril.a@gmail.com

Source: Daily Dawn, 22/10/2008

 

 

 

 Posted by at 11:20 am

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