The doomsday scenario that Mr Jinnah predicted for Pakistan
WHEN the news came through that Japan would be charging a negative interest rate, it got me wondering. Japan, like Pakistan, is crippled with its public debt, a massive mistake that has seen their government running out of ideas on just how to pay back even the interest that accrues on such debt, one from which they cannot run away.
On the same page of ' The Financial Times' of London was a story in which the Government of Pakistan has been asked to cut down its infra-structural investments by 27.5 per cent, and to try to reverse the dangerously rising public debt. A report in another US newspaper dedicated to economic analysis does not use very nice words about the ' Pakistani banker' calling him a government clerk. There are reasons for them to use such vivid expressions.
To understand how the way the world of economics works it is also important to study the way people like you and me save, not to speak of the way our banks use our money to invest. A comparative analysis of our neighbours with regard to their saving habits is also called for. All this will give us a glimpse of the environment towards which are headed.
First Japan's 'negative' interest rate. The Government of Japan's central bank has imposed a 0.5 per cent fine on the amounts left with banks that are not given to entrepreneurs as investment. They have also imposed a ceiling on banks as far as lending to government is concerned, and that is a limit of only 25 per cent of their total funds available for investment. This means that Japanese banks have to aggressively find entrepreneurs to invest, so that the Japanese economy can return to its 'pre-public debt' condition.
In Pakistan we have a situation where the government is sucking away almost 87.4 per cent of all funds available with banks. To please bank bosses they have removed the cap on top banker's salaries. It is now normal, if you can call it that, for Pakistani bank presidents to have an eight figure salary. One top banker, an official favourite, has a monthly salary of Rs. 18,000,000 a month. Put simply he gets Rs. 1.8 crore a month.
But then with the government spending blindly on colourful train projects with amounts that boggle the mind, just where is all this money coming from? The statement of Punjab's chief minister yesterday, as reported on Monday, that the Orange Train was more important than educating the poor, makes pathetic reading. Such a low has never been seen in Pakistani politics. Before continuing on my central economic argument, let me quote Mr. M. A. Jinnah, from his August 11, 1947, speech. He said, and I quote verbatim: "Now that we are free, we must spent 20 per cent of our national resources towards educating the poor. Otherwise, each government will be more corrupt than the last, leading to the demise of the State." No further comment is needed.
So we have a situation in Pakistan where our banks are purchasing more and more fancifully named ' junk bonds' with attractive interest rates masquerading as 'returns'. The government consumes the bond money for its fancy projects and leaves a few crumbs for the banks to lubricate itself. Both the rulers and their bankers go home smiling.
But what about the savers? The aver- age saving of the average savers in the sub-continent makes amazing reading. The five-year average saving rate of India is 31.9 per cent of their income. That of Bangladesh 29.7 per cent, while Sri Lanka stands at 24.5 per cent. Pakistan has fallen from its height rate of the 1960s of 15.1 per cent to a miserable low of just 9.3 per cent. These are World Bank figures published December 2015 in its annual report. Given our social spending habits I have serious doubts about even 9.3 per cent. But then the level of corruption and massive endemic tax evasion play a role in this figure, which is what a government official told the World Bank report writer. Nothing like finding excuses to explain ourselves.
So given this situation where Pakistani business persons find it impossible to raise money for their enterprises, where bankers are in reality ' government clerks' dishing out the money of the people to the government in the shape of 'bond investments', where infra-structural spending has crossed bizarre levels and public debt is now clogging up the system to an extent where repaying the interest is nearing the impossible level, and where bank profits are at record levels, the question surfaces: 'Is the State of Pakistan economically viable?'
We must blame our virtually clueless bankers of a moral corruption where they are betraying the trust of the people. Are they in league with our allegedly corrupt rulers? Economic writers are not in the business of blaming anyone, but we must seriously doubt the integrity of our top bankers. By recruiting MBAs, foreignqualified or locally is irrelevant, instead of serious students of economic analysis, they have denuded our institutions of quality minds. The classical Harvard definition of an MBA is "a person with some experience provided with a rudimentary understanding of everything so he becomes a decision-maker". Experts all over the world call them "glorified clerks". Banks the world over have capped their recruitment, and correctly so. In Pakistan they have played havoc with our banks. The results speak for themselves.
Today we have a situation where these 'glorified clerks' have played havoc with bank investment in 'junk bonds' which will never be returned. These banks look, on paper only, fat and plump with paper profit. The word "accrued" is repeatedly used by their accountants. Very soon those not slim and healthy will fall. The very first casualty is before us. The next ones will surprise the innocent Pakistani saver.
Pakistan is not a Japan which has a sensible, honest and strong central bank. Unlike Japan it does not have 100 per cent literacy rate. If anything the opposite is true. Now public debt levels are at such frightening levels that the IMF wants Pakistan to cut infra-structural spending by 27.5 per cent. To our rulers education does not matter. Traders are not touched by not paying taxes.
The question is what needs to be done? The SBP must act to save the day, and they must curb and audit all banks. A new policy of investment to government must be spelled out. Fines on banks not lending to private businesses must be enforced. The government must force every Pakistani with a CNIC to declare their assets, even if it is zero. Pakistan must accept every tax declarations and, if needed, prove them otherwise. Now is the time to act. Otherwise it might turn out as Mr. Jinnah predicted.