The dooms­day sce­nario that Mr Jin­nah pre­dicted for Pak­istan

The Pak Banker - - FRONT PAGE - Rahim Sheikh

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.

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