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Shaukat Tareen has just taken over the economic management of the country as the new Finance Advisor to the Prime Minister at a time when monetary and financial crisis has gripped the developed economies globally. Pakistan is also facing severe crisis of confidence since March 2007 when the judicial crisis developed by the removal of senior judiciary by the then president General Musharraf.
These crises have been accelerating gradually and have strengthened during the last six months as these issues were almost completely ignored by the present government. It has been said by various analysts through the electronic and print media that the implementation of National Reconciliation Ordinance (NRO) has eroded the confidence of investors, business community and the "silent majority" because the implementation of NRO amounts to legalising the corrupt practices. Therefore, it follows that doors for further corruption may remain open for the future unchecked and this has been the major reason for loss of confidence in the system. This loss of confidence in the system has created serious economic, financial and monetary issues for the country.
The country is under the grip of severe inflation. There may be several reasons for this but we will only discuss few important ones that are relevant to our discussion. As said by the Governor of the State Bank of Pakistan, the major reason is heavy borrowing by both past and present governments from the State Bank of Pakistan to meet its day to day non development expenditure. This governmental borrowing has surpassed all the previous records which forced the Central Bank to raise its discount rates twice during 2008. The Central Bank also raised the Cash Requirement Ratio (CRR) to 9% (now revised downward to 8%).
The increases in discount rates should have discouraged government's huge borrowing, but it did not happen and the government kept on borrowing more and more to finance its spending. The measures taken by the Central Bank were meant to check the inflationary trends, instead these created economic stagnation due to reduced liquidity within the banking system. These measures further affected the exports of the country as industrial and commercial organisations could not meet their targets resulting in increased deficit in the balance of payments.
It remained an arguable point whether the measures taken by the Central Bank to curtail inflationary trends were justified or not. Those who oppose these measures argue that the SBP should have taken measures to remind the government publicly that it was exceeding its limit. There should have been a public pressure against this excessive borrowing that should have forced the government to control its borrowing. Subsidies in all walks of our economic life and careless non-development public spending should have been checked. More austerity measures should have been ensured instead of raising the discount rates that impacted the life of the common man.
It is also being argued why a common man should pay the price of excessive government borrowing for non-developmental expenditure and careless government spending. It is true what the President of Pakistan has recently remarked that Pakistan was not a limited company that would go bankrupt. But it is believed that the governments spending habits are in line with corporate culture. The practice of performing "Umras" by the official dignitaries with an entourage of relatives and friends at public expense cannot be justified.
The purchasing of most modern huge luxurious cars for the newly elected ministers cannot be justified, when locally produced cars are available. The recent trips to the US of the President and the Prime Minister included friends and relatives who stayed in expensive hotels and were entertained at the cost of government exchequer. Lavish Iftar and other parties organised there are good examples of an irresponsible behaviour by those who organised and attended those. If we look at the Iftar parties organised during the month of Ramadan in Islamabad and all the four provincial capitals of Pakistan at the public expense, we should be ashamed that a nation struggling to borrow money for economic survival is behaving in such an irresponsible manner. Donors may be able to raise funds for Pakistan provided they trust those who spend these funds.
It seems difficult to understand if any country among the "Friends of Pakistan" would like to come forward to help us if we maintain this irresponsible behaviour. The practice of 'I scratch your back and you scratch mine' must be discontinued. Under these critical circumstances when the priority should be to revive the country's shaken economy, the government must establish responsible behaviour so that the stakeholder's confidence in the democratic system is restored. It is expected that the newly appointed Finance Advisor should devise financial discipline for government spending to ensure austerity and simplicity?
Heavy government borrowing from the State Bank and lower export proceeds has increased pressure on the Pakistani rupee. Pakistani rupee has depreciated almost 33 per cent during the last six months. This has pushed the cost of production substantially as our industry is mostly dependent upon imported raw materials.
We should explore ways and means to encourage industrial growth based upon indigenous raw materials instead of imported ones. We should also seek to import essential raw materials from sources that are cheaper instead of importing these from conventional sources. The possibility of imports from India should be reviewed carefully to save our foreign exchange and reduce cost of production.
The price of oil has come down from dollars 140 to dollars 80 per barrel. That should make a substantial impact upon our trade deficit. Besides this, the prices of other commodities, especially food-related items, are also showing downward trends. These recent developments should arrest some inflationary trends. Therefore, this should be the right time for the Central Bank to review once again if there is a need to reduce the discount rates. There is a strong case for a push in the national economy. We need to expand our export targets by being competitive globally, especially when the global economy is witnessing depression.
Now may be the time for our textile and other exporting industries to play a positive role, due to the favourable exchange rate, for exports. It is the time to start a dialogue with the stakeholders to ensure how the industrial and commercial sectors should play a role to create more jobs by expanding manufacturing facilities. This should reduce the burden of the common man who has been hit the hardest, due to the withdrawal of subsidies and general price increases. We hope that the Finance advisor would pay due attention to these issues.
The capital markets of Pakistan remain frozen without any notable trading activity since August 28th 2008. This seems to be due to investor's loss of confidence in government policies. There seems to be little hope of resumption of trading in these markets soon if stakeholders' grievances are not addressed. It appeared that there was no one responsible in the government who could have started the consultation process with stakeholders to revive investor's confidence. It is pity that we have given no importance to the functioning of our capital markets. We are hesitant to confront the issues. After this mess had been created by the higher discount rates because of heavy government's borrowing, the government should take the initiative to restore shaken confidence.
We saw government nowhere resolving the crisis. It was suggested that the capital markets could be saved by forming a 20-30 billion rupees "Special Fund", which should enter the market if need be to buy shares of government's owned entities from foreign investors. It was hoped that a major sharp fall of capital markets could be averted through this process. As soon as confidence is restored, the "Special Fund" would be able to resell it again in the market at reasonably higher prices. Most of the foreign holding is of government owned entities.
Therefore, the government should not be hesitant to take this initiative and should be ready to pump in the desired liquidity to safeguard its own portfolio. So far, the government has been unable to raise this amount from its own cash rich entities like State Life, NIT, National Insurance, NBP, EOIB and others. As the government has been unable to arrange such a meagre amount to support the capital markets, we wonder how investors and other stakeholders would be able to develop their trust in the system.
The delay in the government's ability to establish the desired liquidity has resulted in the insolvency of some brokerage houses which has caused severe concerns among the investing public.
The responsible governments in other parts of the world have acted swiftly to correct and rescue financial markets. We should take lessons from the US, UK and other parts of the European Union where corrective measures were taken sooner rather than later. We see UK forming an Economic War Cabinet that included eminent personalities of businesses and corporate sectors to deal with the explosive situation. The British Prime Minister personally persuaded Lloyds bank to take over HBOS, a failing bank.
These measures were meant to correct the worsening situations and create confidence in the institutions by including the business community to assure that the government is serious and means business. The rescue bill that was defeated in the House of Representatives in the US, proposing a relief package of dollars 700 billion earlier, was revived and approved later with minor changes within a span of five days. The government in Germany announced full support to save its one of the biggest mortgage lender by providing full protection to its depositors.
The Irish Government decided to protect the depositors of all Irish Banks by acting proactively to avoid any crash in banking sectors. In addition to these measures, the central Banks of these countries immediately reduced the bank rates to stimulate lending and generate investor's confidence. These are few examples how responsible democracies in the world have tried to resolve their crisis. No such things happened in Pakistan. No senior member of the government in Pakistan has even mentioned the local crisis. They either have no experienced peoples to handle the capital market crisis or they have no idea about the significance of the issues that need to be addressed or how it should be resolved.
The President or the Prime Minister should have been addressing the nation to ensure that every thing will be done to prevent the collapse of capital markets, but that did not happen. Recently, the directors and the senior members of KSE met and asked the government to resolve these issues or face a closure of the capital markets. If no timely steps are taken to save the capital markets, it is feared that other sectors of our economy may also be affected. It is expected that the new Finance Advisor will appreciate the urgency to resolve these issues through a consultation process with the stakeholders.
There is an urgent need to rebuild the shaken confidence of investors, businessmen and industrialists. This can be done through constant contact and dialogue with them by a responsible person like the Finance Advisor and by formulating the right type of financial policies. It is desired that an expert's panels, be composed in all areas of economic activities, consisting of eminent and experienced people.
These groups should assist and advise the government to form the right economic and financial policies, suitable for our economy and environment. It is a difficult task and beyond the reach of any one individual. It should be ensured that the cronies are not appointed in these experts' panels, as has been done in the case of several recent appointments announced by the government. Only competent, experienced, dedicated and honest persons should be included.
This policy framing should be done with utmost urgency so that investors and business community should feel at ease and flight of capital is arrested. It should encourage those willing to bring back their capital from overseas countries. This may ease some of the pressures on our foreign exchange outflows and may strengthen the value of the Pakistani rupee. This should be one of the top priorities of the Finance Advisor.

Copyright Business Recorder, 2008

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