The cost of SBP’s autonomy
The cost of SBP’s autonomy
By Dr. Javed Akbar Ansari
Despite its much-flouted concern with banking sector efficiency, the State Bank remains an incompetently managed and highly inefficient organisation. This is evident from the single fact that during Ishrat Hussain’s governorship (1999-2004) the State Bank has suffered a cumulative loss of over Rs65 billion in foreign exchange transactions.
This note examines the financial performance of the State Bank (and not that of its subsidiaries) for the year 2003-2004. During this year the SBP made an operating loss of Rs568 million. Operating loss for 2002-2003 had been Rs1,376 million.
Net profit for 2002-2003 had been only Rs24.8 million. This rose to Rs6.1 in 2003-2004. However as note 40.1 to the accounts shows this was entirely due to the privatisation of the Habib Bank the sale of whose shares fetched no less than Rs6.08 billion. If this figure is deducted net profit for 2003-2004 fall to about Rs28 million as again Rs24.8 million for the previous year.
The SBP Annual Report for 2002-2003 Vol II (p 96) shows that net profit for the year ending June 30th 2003 stood at Rs39 million - why this has been reduced to Rs24.8 million in the 2004 Report Vol II (p 130) is not explained.
There are many other unexplained discrepancies between the profit and loss accounts for 2002-2003 as published in the two Annual Reports. This creates doubt about the authenticity of all SBP estimates.
Even the meagre net profit of Rs24.8 million for 2003-2004 was made possible by disposal of SBP filed assets during 2003-2004 worth Rs149 million. The notes to the accounts give no details of the assets that were disposed of and if this amount were also deducted and SBP would show a significant net loss for 2003-2004. The more than three fold increase in "other income" from about Rs2 billion to over Rs7 billion) in 2003-2004 is entirely due to these two measures. (HBL) share sale and sale of SBP fixed assets)
We also of course do not know what the government has done with the Rs6.08 billion it received from the SBP for the sale of 26 per cent of HBL shares in June 2004. This Rs6 billion does not seem to appear very clearly in Shaukat Aziz’s budget estimates for 2004-2005.
The SBP’s interest income declined from Rs18.5 billion in 2002-2003 to Rs6.5 billion in 2003-2004. There was a colossal decline in net earnings on MTB’s from Rs7.3 billion in 2003-2004 to Rs1.7 billion in 2003-2004 (note 31). This reflects not so much a decline in average yields as it does a decline in acceptances. The volume of outstanding six month T-Bs fell sharply during 2003-2004. The average six month T-B yield actually rose from 1.65 per cent in 2002-2003 to 2.07 per cent in 2003-2004. The SBP’s account of the reasons for decline in interest income in the domestic market is thus not entirely convincing. Interest rates have been rising during the last quarterly of FY-2003-2004 and the outstanding domestic public debt has risen by 6.5 per cent during that year.
Interest income from foreign currency deposits and securities increased very modestly from about Rs6.4 billion in 2002-2003 to about Rs6.9 billion in 2003-2004 despite a significant increase in global interest rates. The interest expenses of the SBP, in 2003-2004, rose by almost 100 per cent. The notes to the accounts do not provide any details about the distribution of thee expenses in terms of local and foreign transactions. However the major loss of Rs3.8 billion was with respect to profit and loss transactions.
During 2002-2003 the State Bank incurred a loss of Rs11.8 billion on foreign exchange transactions. The SBP Annual Report for 2002-2003 attributed this loss primarily to a 3.7 per cent appreciation of the Rupee during 2002-2003. during 2003-2004 the Pakistan appreciated by a further 1 per cent yet the SBP realised a gain of Rs755 million on exchange rate transactions. SBP is not justified in its view that Rupee depreciation necessarily leads to a net gain in foreign exchange transaction value and Rupee appreciation to a loss.
During 1999-2004 the only year when SBP’s expectation of a negative relationship between exchange rate value and exchange gains was realised was 2002-2003. In 1999-2000 and 2000-2001 the Rupee depreciated and SBP incurred large losses on foreign exchange transactions. In 2001-2002 and 2003-2004 the Rupee appreciated and yet there was a gain of foreign exchange transactions.
Similarly there is no necessary negative association between the size of foreign exchange reserves and gains on foreign transactions. Even a cursory glance at profits and loss accounts of the central banks of both India and China shows that during 1999-2000 to 2003-2004 they realised massive foreign exchange transaction gains despite holding much larger reserves than Pakistan. Nor are depressed market interest rates any excuse for losses or low gains on foreign exchange transactions because these affects earnings not value of foreign assets. In any case China and India face the same world market situation as Pakistan. Why are they able to make much larger gains on foreign exchange transactions in a typical year. Obviously because of the honesty and skill of their foreign exchange managers.
The State Bank under Ishrat Hussain’s governorship has on average lost Rs13 billion per year during 1999-2004 on foreign exchange transactions. This is a colossal loss and there is a need for a detailed long form audit of the work of the SBP, Exchange and Debt Management Department, the Exchange Policy Department, the Risk Management Department and the SBP Treasury. Such an audit will reveal the chronic inefficiency of the SBP exchange management team. Those responsible for these gigantic foreign exchange losses should be called to account under due process of law.
While the SBP’s interest rate earnings have decreased by about 45 per cent during 2003-2004 in comparison to the previous year, its interest expenditure has more than doubled from Rs2.57 billion in 2002-2003 to Rs5.20 billion in 2003-2004. Note 32 shows that this was due to a massive loss of Rs3.3 billion on profit and loss financial transactions. No explanation is provided for this gigantic loss.
Other income rose significantly but this was mainly due to a massive increase of almost 30 per cent in bank penalties, surely not a healthy sign showing that side stepping prudential regulation requirements has become easy and affordable in Pakistan (note 36)
Establishment costs have been held at almost Rs6.1 billion in both 2002-2003 and 2003-2004. However salary expenditure has gone up by 7 per cent (significantly higher than the 2003-2004 inflation rate) and retirement payments have risen by 15 per cent. Retirement expenses are by far the single largest establishment cost. Its share in establishment cost has gone u from 22.3 per cent in 2002-2003 to 26.1 per cent in 2003-2004.
This shows that the SBP continues to pursue a vicious policy of retrenchment and downsizing. Staff morale is low as the threat of forced retirement and retrenchment is ever present. Worker participation and collective bargaining in organisation management has been totally dismantled. Meanwhile exorbitantly paid consultants dominate policy making, so salary expenditure continues to rise and the total workforce does not fall as operating losses continue to accumulate.
The over all picture that emerges is not a pretty one. The SBP is an increasingly inefficient organisation, which produces operating losses year after year. Accumulated losses on foreign exchange transactions for the period of Ishrat Hussain’s governorship approximate Rs65 billion, interest expenditure on domestic market operations has risen significantly while domestic interest income has fallen. The net profit in 2003-2004 is entirely due to the sale of HBL share sand the disposal of SBP’s own fixed assets. This net profit entirely disappears if these two items are subtracted from it. Salary expenditure continues to rise, as does the number of total SBP employees while a major retrenchment is underway. Workers are demoralised and slick professionals with little understanding of local market condition dominate policy making.
Granting autonomy to the State Bank has reduced its operational efficiency. Subordinating the State Bank to the authority of Parliament and of the Ministry of Finance is essential if the massive losses on foreign exchange transactions are to be eliminated, the cause, underlying these losses are to be identified and those responsible for these losses are to be called to account. It is equally important to abandon the market based monetary policy, which the SBP has been pursuing since 1993 and which is an important factor in increasing unemployment and misdistribution of income in Pakistan.
An autonomous central bank is not autonomous of the international money markets. It impose the discipline and the preferences of these markets on the people of Pakistan and deprives the Pakistani state of its economic sovereignty. Moreover as the continuing losses at the State Bank show this does not lead to a more efficient use of national resources especially as far the management of national foreign exchange reserves is concerned.
The question that must be answered is which foreign financial institutions and imperialist governments gain when Pakistan suffers foreign exchange transaction losses, who are the officials who enable these foreign institutions and governments to make such gains and why are these officials not being punished.
Ending the State Bank’s autonomy should be a major policy of a popular, anti imperialist Islamic government in Pakistan.
from here
By Dr. Javed Akbar Ansari
Despite its much-flouted concern with banking sector efficiency, the State Bank remains an incompetently managed and highly inefficient organisation. This is evident from the single fact that during Ishrat Hussain’s governorship (1999-2004) the State Bank has suffered a cumulative loss of over Rs65 billion in foreign exchange transactions.
This note examines the financial performance of the State Bank (and not that of its subsidiaries) for the year 2003-2004. During this year the SBP made an operating loss of Rs568 million. Operating loss for 2002-2003 had been Rs1,376 million.
Net profit for 2002-2003 had been only Rs24.8 million. This rose to Rs6.1 in 2003-2004. However as note 40.1 to the accounts shows this was entirely due to the privatisation of the Habib Bank the sale of whose shares fetched no less than Rs6.08 billion. If this figure is deducted net profit for 2003-2004 fall to about Rs28 million as again Rs24.8 million for the previous year.
The SBP Annual Report for 2002-2003 Vol II (p 96) shows that net profit for the year ending June 30th 2003 stood at Rs39 million - why this has been reduced to Rs24.8 million in the 2004 Report Vol II (p 130) is not explained.
There are many other unexplained discrepancies between the profit and loss accounts for 2002-2003 as published in the two Annual Reports. This creates doubt about the authenticity of all SBP estimates.
Even the meagre net profit of Rs24.8 million for 2003-2004 was made possible by disposal of SBP filed assets during 2003-2004 worth Rs149 million. The notes to the accounts give no details of the assets that were disposed of and if this amount were also deducted and SBP would show a significant net loss for 2003-2004. The more than three fold increase in "other income" from about Rs2 billion to over Rs7 billion) in 2003-2004 is entirely due to these two measures. (HBL) share sale and sale of SBP fixed assets)
We also of course do not know what the government has done with the Rs6.08 billion it received from the SBP for the sale of 26 per cent of HBL shares in June 2004. This Rs6 billion does not seem to appear very clearly in Shaukat Aziz’s budget estimates for 2004-2005.
The SBP’s interest income declined from Rs18.5 billion in 2002-2003 to Rs6.5 billion in 2003-2004. There was a colossal decline in net earnings on MTB’s from Rs7.3 billion in 2003-2004 to Rs1.7 billion in 2003-2004 (note 31). This reflects not so much a decline in average yields as it does a decline in acceptances. The volume of outstanding six month T-Bs fell sharply during 2003-2004. The average six month T-B yield actually rose from 1.65 per cent in 2002-2003 to 2.07 per cent in 2003-2004. The SBP’s account of the reasons for decline in interest income in the domestic market is thus not entirely convincing. Interest rates have been rising during the last quarterly of FY-2003-2004 and the outstanding domestic public debt has risen by 6.5 per cent during that year.
Interest income from foreign currency deposits and securities increased very modestly from about Rs6.4 billion in 2002-2003 to about Rs6.9 billion in 2003-2004 despite a significant increase in global interest rates. The interest expenses of the SBP, in 2003-2004, rose by almost 100 per cent. The notes to the accounts do not provide any details about the distribution of thee expenses in terms of local and foreign transactions. However the major loss of Rs3.8 billion was with respect to profit and loss transactions.
During 2002-2003 the State Bank incurred a loss of Rs11.8 billion on foreign exchange transactions. The SBP Annual Report for 2002-2003 attributed this loss primarily to a 3.7 per cent appreciation of the Rupee during 2002-2003. during 2003-2004 the Pakistan appreciated by a further 1 per cent yet the SBP realised a gain of Rs755 million on exchange rate transactions. SBP is not justified in its view that Rupee depreciation necessarily leads to a net gain in foreign exchange transaction value and Rupee appreciation to a loss.
During 1999-2004 the only year when SBP’s expectation of a negative relationship between exchange rate value and exchange gains was realised was 2002-2003. In 1999-2000 and 2000-2001 the Rupee depreciated and SBP incurred large losses on foreign exchange transactions. In 2001-2002 and 2003-2004 the Rupee appreciated and yet there was a gain of foreign exchange transactions.
Similarly there is no necessary negative association between the size of foreign exchange reserves and gains on foreign transactions. Even a cursory glance at profits and loss accounts of the central banks of both India and China shows that during 1999-2000 to 2003-2004 they realised massive foreign exchange transaction gains despite holding much larger reserves than Pakistan. Nor are depressed market interest rates any excuse for losses or low gains on foreign exchange transactions because these affects earnings not value of foreign assets. In any case China and India face the same world market situation as Pakistan. Why are they able to make much larger gains on foreign exchange transactions in a typical year. Obviously because of the honesty and skill of their foreign exchange managers.
The State Bank under Ishrat Hussain’s governorship has on average lost Rs13 billion per year during 1999-2004 on foreign exchange transactions. This is a colossal loss and there is a need for a detailed long form audit of the work of the SBP, Exchange and Debt Management Department, the Exchange Policy Department, the Risk Management Department and the SBP Treasury. Such an audit will reveal the chronic inefficiency of the SBP exchange management team. Those responsible for these gigantic foreign exchange losses should be called to account under due process of law.
While the SBP’s interest rate earnings have decreased by about 45 per cent during 2003-2004 in comparison to the previous year, its interest expenditure has more than doubled from Rs2.57 billion in 2002-2003 to Rs5.20 billion in 2003-2004. Note 32 shows that this was due to a massive loss of Rs3.3 billion on profit and loss financial transactions. No explanation is provided for this gigantic loss.
Other income rose significantly but this was mainly due to a massive increase of almost 30 per cent in bank penalties, surely not a healthy sign showing that side stepping prudential regulation requirements has become easy and affordable in Pakistan (note 36)
Establishment costs have been held at almost Rs6.1 billion in both 2002-2003 and 2003-2004. However salary expenditure has gone up by 7 per cent (significantly higher than the 2003-2004 inflation rate) and retirement payments have risen by 15 per cent. Retirement expenses are by far the single largest establishment cost. Its share in establishment cost has gone u from 22.3 per cent in 2002-2003 to 26.1 per cent in 2003-2004.
This shows that the SBP continues to pursue a vicious policy of retrenchment and downsizing. Staff morale is low as the threat of forced retirement and retrenchment is ever present. Worker participation and collective bargaining in organisation management has been totally dismantled. Meanwhile exorbitantly paid consultants dominate policy making, so salary expenditure continues to rise and the total workforce does not fall as operating losses continue to accumulate.
The over all picture that emerges is not a pretty one. The SBP is an increasingly inefficient organisation, which produces operating losses year after year. Accumulated losses on foreign exchange transactions for the period of Ishrat Hussain’s governorship approximate Rs65 billion, interest expenditure on domestic market operations has risen significantly while domestic interest income has fallen. The net profit in 2003-2004 is entirely due to the sale of HBL share sand the disposal of SBP’s own fixed assets. This net profit entirely disappears if these two items are subtracted from it. Salary expenditure continues to rise, as does the number of total SBP employees while a major retrenchment is underway. Workers are demoralised and slick professionals with little understanding of local market condition dominate policy making.
Granting autonomy to the State Bank has reduced its operational efficiency. Subordinating the State Bank to the authority of Parliament and of the Ministry of Finance is essential if the massive losses on foreign exchange transactions are to be eliminated, the cause, underlying these losses are to be identified and those responsible for these losses are to be called to account. It is equally important to abandon the market based monetary policy, which the SBP has been pursuing since 1993 and which is an important factor in increasing unemployment and misdistribution of income in Pakistan.
An autonomous central bank is not autonomous of the international money markets. It impose the discipline and the preferences of these markets on the people of Pakistan and deprives the Pakistani state of its economic sovereignty. Moreover as the continuing losses at the State Bank show this does not lead to a more efficient use of national resources especially as far the management of national foreign exchange reserves is concerned.
The question that must be answered is which foreign financial institutions and imperialist governments gain when Pakistan suffers foreign exchange transaction losses, who are the officials who enable these foreign institutions and governments to make such gains and why are these officials not being punished.
Ending the State Bank’s autonomy should be a major policy of a popular, anti imperialist Islamic government in Pakistan.
from here
posted by Alghazalians at 1:11 AM
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