Number Crunching – The Economic Conundrum

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” - Ogden Nash

There is an urgent need to declare an economic emergency in the country as the government continues to finance its deficit through foreign debt and local bank borrowings. The excessive government borrowings coupled with increased interest rates has resulted in crowding out effect as the growth in private sector lending has declined sharply. This phenomenon has in effect dented the private sector investments largely, and economic growth remains stunted as a result.

Pakistan’s GDP growth has been the lowest in the South Asian region since 2008. Analysts have been giving various reasons for the dismal economic performance including war on terror, international oil prices and global financial crisis. In my opinion, the center point of current economic fiasco lies beyond the mentioned factors considering the historical performance (average GDP growth rate of Pakistan from 2001 – 2007 averaged at 6.15%) as well as the growth of the regional economies.

The core cause of the crippled economic growth has been the massive financial indiscipline of the current financial managers. The fiscal deficit (as a % of GDP) has been constantly above 6% since 2008. The government has been funding the ever growing deficit by Debt and printing money.

The increasing demand of the Government to fund its deficits have resulted in a total debt of PKR 10 trillion (up from PKR 5 trillion in 2007), out of which PKR 5.4 trillion is Domestic Debt while PKR 5 trillion (USD 58.3 billion) is Foreign Debt. The data released by the State Bank of Pakistan indicates that Broad Money Supply growth (M2) has averaged 11.5% over the past 3 years.

The recently released “Quarterly Performance Review of the banking system 2010” by the State Bank of Pakistan indicates that there has been growing evidence of banks’ flight for the government securities which now constitute around 30.4 percent of banks’ assets compared with 19.3 percent in Dec-08. Share of advances has witnessed a concomitant drop, from 60.8 to 52.0 percent during the past two years. Unsurprisingly, return on government paper now accounts for 34.5 percent of banks’ gross mark-up/interest income, compared to 28.8 percent in Dec-08.

The consequences of Unsustainable borrowings

The phenomenon mentioned earlier has very important implications on our economy both in the long run and in the short run. The persistent demand for funding on Government’s behalf (through debt and printing money) has fuelled inflation and thereby NOT allowed the State Bank of Pakistan to lower the interest rates. Pakistan currently has the highest inflation and interest rates in the region.

Additionally, the State Bank data suggests that growth in government borrowings, in a rising interest rate scenario, has been crowding out the private sector lending significantly. The shift in asset mix, from advances to investments in government papers for the Banks has only channelized the flow of funds towards the Government.

The Short Run Consequences:

The currently prevailing interest rates are significantly beyond the comfort zone of the business community. As a result, the business community looks to consolidate and defer their projects that require significant capital deployment. It is very important to note that despite high interest rates prevailing in the country, the inflation rate has been soaring and no respite is expected in the short run as the Government continues to borrow from the State Bank to plug their funding gap. The General Inflation this year has been 15% while the food inflation reported by Federal Bureau of Statistics stood at 19%.

It is very safe to assume that currently our economy is in the state of Stagflation and it is expected to remain so in the short run.

The Long Run Consequences:

The long run consequences of ongoing budget deficits are drastic and will be felt in times to come. Firstly, the current budget deficits are NOT as a result of deficit spending towards Public Sector Development, instead only PKR 300bn out of the budgeted PKR 610bn were spent by the government in the previous year (as opposed to the case in India where the budget deficit is a result of massive Public Sector Development Spending). As a result, the infrastructure development necessary to promote economic growth remains ignored in toto. It is now a matter of grave concern that the Government has not been able to fully utilize the allocated PSDP fund over the last 3 years.

On the other hand the crowding out of private sector lending has impacted the private sector investment in infrastructure projects severely. A classic example is the delay in a number of power projects undertaken by the private sector. Data from various banks suggest that there has been on average 2-3 years of delay from the scheduled timeline for such projects to get commissioned. The result is the prolonged power outages and expensive electricity. If the current scenario prevails, WAPDA expects that the power suffering could continue beyond 2018. Not to mention the economic loss associated.

The Bottom line:

The center point of all the economic vows lies in the sharp increase in Government Borrowings over last 3 years without the government spending towards infrastructure and public development. Assuming 170 million of population, each citizen is under the debt of PKR 59,000/- per capita. How it will be repaid is a million dollar question.

The Government has to take the following actions immediately to set the economy on track:

1. Improve Tax to GDP over a period of next couple of years through urgent tax reforms. Currently Pakistan’s Tax to GDP is the lowest in the region. A 1% improvement in tax to GDP ratio adds approximately PKR 200bn to the national kitty.
2. Revamp the Public Sector Enterprises (PSEs) since they suck at least PKR 250bn annually, which is approximately half that of the total PSDP fund allocation last year
3. Efficient and targeted utilization of subsidies instead of a blanket subsidy like in the case of CNG, Sasti Roti scheme etc
4. Plug the leakages of about PKR 400bn of corruption in the system on an urgent basis
5. Serious belt tightening and reduction in day to day operational spending by the Government

The bottom line is that unless the Government takes strict measures towards spending cuts, seize additional borrowings, and utilize the deficit spending towards the infrastructure development, our economic nightmares will continue.

Think from your brain and NOT from your heart – Raymond Davis Saga finally comes to an end as expected

It’s acceptable to think from your heart sometimes …. Especially when Pakistan is playing a cricket match …. However, in matters of national and strategic interests you have to be extremely rational in your approach keeping all the emotions aside.

Our media … well, let’s be fair, they have been used and abused in this espionage game.

The spectrum of our media ranges from Left libertarian to Right Authoritarian. However, the majority of our media analysts and anchors are now either Left Libertarian (minority) e.g. Najam Sethi, Mosharraf Zaidi, Farrukh Saleem, Eijaz Haider etc. or Right Libertarians (majority) e.g. all the main stream media personnel (Kamran Khan, Hamid Mir, Ansaar Abbasi, Mujeeb Ur Rehman Shaami, Haroon Rasheed, Javed Chaudhry, Saleem Saafi …. And the list goes on)

Coming back to the Raymond Davis Saga, our mainstream media just stand confused. They don’t know whom to blame for this drop scene. Someone is blaming Punjab government, others cracking down on Federal government; a few got the courage to blame ISI and lastly interesting comments on judiciary, “this judgment is a black scar on the face of judiciary”. Well well well … I thought that the judiciary was independent … isn’t it?? Ooooppppsssss !!!!

While our mainstream media pundits are running around like a headless chicken, after realizing that all their predictions and propaganda is flushed down the drain and they have been used as a tool by our spy agency to achieve their own goals (strategic interests), the Left Libertarians stand smiling as if they already knew what was going to happen eventually, and that was common sense isn’t it?

This brings me back to the title of the subject that matters of national interests should not be thought through hearts. Currently, mainstream media is baffled with emotions and their objective analysis has been choked and hampered.

Some reality check for our audience; our economy is barely growing at a meager rate of 2% to 3% compared to average regional growth of 6% - 8%. We are in IMF program (rightly or wrongly is a separate debate) which requires slashing of subsidies to curtail our fiscal deficit that is ever increasing. Inflation is spiking so much that real incomes of middle class are actually decreasing. Our army is engaged in war on terror and demanding more money to fund them, tax to GDP is pluming down each year means lesser growth in Government’s revenue. As Farrukh Saleem rightly said “Government wakes up in the morning starts printing 2,000 million rupees to fund its intraday expenses and calls it a day”. Under this brutal reality, here comes Mr. Davis, an “American Rambo”, as some have labeled him, and conducts a Jason Bourne style assassination. Rest is needless to repeat.

Now the question is what is our national interest? Keep a myopic view and execute the CIA contactor, or re-negotiate our terms with CIA by sitting on the table and redefines the rules of war on terror. In the pretext of our circumstances, as I mentioned earlier, any sane person would opt for the latter option. Our Agency did exactly the same, created public pressure, through media leaks while Punjab Government seized the opportunity to gain some political scores. Shah Mahmood Qureshi was sacrificed in the due course. Senator John Kerry’s visit to Islamabad shows the desperation of Americans to get their contractor released. Why Americans were desperate? Simply because they didn’t want this case a precedent for other countries. Subsequent to several meetings of the spy agencies, Mr. Davis was released after fulfilling the necessary legal requirements. He was offered an exit passage in accordance with the rule of law.

Like it or not, Mr. Davis was used as a bargaining chip by ISI and once the “Standard Operating Procedures” were renegotiated, it was considered unnecessary and dangerous to keep Mr. Davis in Pakistan further. Off course, it’s not wise to strain a relationship with international community beyond a certain level, after which you have to behave maturely and go for a resolution.

In my opinion, we have cut a better deal under the circumstances. People should understand that we have to first build ourselves, economically and socially by good governance and vibrant / visionary leadership in order to be in a position to influence our terms, else, all of us will suffer further.

Our mainstream media should analyze the situation in the correct context (like the Left Libertarians did in this case), stop dragging the issue further, and move on to the issues of a much higher importance. For viewers and followers of local media, this whole episode has however, helped to further define the distinction in analytical approaches of Right libertarians and Left libertarians i.e. who thinks through his heart and who uses his brains!

Yet another absurd piece of journalism

While skimming through a number of news papers this morning, I came across yet another piece of absurd and nonsensical journalism. And this time, DAWN was the culprit (Although I find DAWN maintaining relatively better standards in reporting).

The news reported by Mr. Nasir Iqbal appearing in Dawn dated 15^th March 2011 by the title “SC gives loan defaulters chance to file objections” states the following:

“The court has taken up a suo motu notice on media reports that the central bank quietly allowed commercial banks to write off non-performing loans of Rs54 billion under a scheme introduced by former president Pervez Musharraf. The amount swelled to Rs256 billion after the period of written-off loans increased till Dec 2009 (from 1971)”.

The above mentioned lines are ugliest piece of crappy reporting that has numerous flaws and facts twisting.

1. The writer is trying to give a false impression that under some conspiracy scheme, Mr. Musharraf (The president) allowed write off of loans by Commercial Banks (Private Business) through the Central Bank (Regulator). This is clearly fact twisting since the Supreme Court is probing the loan write offs since 1971, but it has nothing to do with Mr. Musharraf or his “scheme”. The writer is clearly giving a false impression that Supreme Court is probably implicating Mr. Musharraf in this case as a mastermind which is certainly NOT the case.

2. Someone should tell this idiot writer that Banking Policy Regulatory Department which deals with the Prudential Regulations for commercial / microfinance banks is headed by the Governor Sate Bank and NOT the President of Pakistan. And there was NO such “special scheme” during 2002 – 2007 that secretly allowed commercial banks to write off loans. Yes there were write offs of the loans in that period and court is perhaps rightly inquiring the matter.

The bottom-line is that the writer here is deliberately misstating the fact and twisting it according to his own bias, giving an impression that Mr. Musharraf was directly involved in facilitating loan write offs. Shame on you Mr. Nasir Iqbal.