Immiserising monetarism
The State Bank’s annual report 2004-2005 provides strong evidence of the continuing failure of market based monetary policy and of financial liberalisation. Despite this there is no indication that the SBP recognises even dimly the need to abandon the voodoo economics of the doctrinaire monetarists of America.
When Dr. Ishrat Hussain assumed charge as SBP Governor he had just published a book entitled Pakistan: the Economy of an Elitist State. One expected this ex-chemistry teacher to use monetary policy initiatives for improving the lot of the poor but the poor have been the main victims of the immiserising monetarism that has been practised during FY 2000 to FY 2005.
Monetary policy failure is reflected first of all in a drastic fall in national savings. National savings fell from 18.7 per cent of GDP in FY 04 to 15.1 per cent in FY 05. Public savings have been almost totally eliminated. They fell by 17 per cent in FY 05 and now equal only about 2 per cent of GDP. Government saving fell by over 32 per cent. Private savings fell by 10 per cent in FY 04 and a further 1.5 per cent in FY 05. Household saving fell by 10 per cent in FY 04 and by 3 per cent in FY 05. The national saving to GDP ratio equalled 21 per cent in FY 03. The value of this ratio has fallen by over 25 per cent during FY 03 to FY 05.
The decline in saving has been accompanied by a relative decline in investment, gross total investment fell from 18.6 per cent of GDP in FY 04 to 17.9 per cent in FY 05 gross fixed investment fell from 16.8 per cent to 16.2 per cent Private investment remained flat at 11.6 per cent in both FY 04 and FY 05. Public investment, like public savings, is disappearing altogether. It now accounts for only about 4 per cent of GDP. As the SBP Report acknowledges "Pakistan is placed at the bottom among (Asian) countries" on this basis (P56). The investment to GDP ratio is 44 per cent in China, 30 per cent in South Korea and 23 per cent in both India and Bangladesh (SBP 2005, Table 2.39).
The decline is savings and investment is directly a consequence of monetary policy orientation. SBP’s monetary policy encourages consumption financing and speculative capital expenditure leading to bloated asset prices and unsustainable consumption expenditures. It discourages fixed capital formation. Real investment fell by 4.4 per cent in FY 04 and grew by only 1.5 per cent in FY 05 when real GDP grew by 8.4 per cent.
SBP’s failure is even more glaringly reflected in the rapidly deteriorating price situation. In its 2004 Annual Report SBP had forecast a 5 per cent growth in CPI for FY 05 - infact CPI rose by 9.3 per cent casting serious doubt on the SBP’s credibility. The CPI increase was entirely due to domestic factors such as food prices and house rents and not due to an escalation of the price of oil. SBP acknowledges the ineffectiveness of its monetary policy to have any impact on food prices and house rents (p 65) and argues that administrative measures alone can moderate these prices. This is an admission of the unsuitability of policy liberalisation and market based monetary management as an instrument for containing inflation in Pakistan. Food inflation during FY 05 averaged 12.5 per cent, higher than in any year since 1995. Price increases in the non-food components of CPI doubled in FY 05 (7.2 per cent) compared to FY 04 (3.6 per cent). House rents rose by 11.3 per cent in FY 05 compared to 4.5 per cent in FY 04.
According to FBS estimates core inflation (prices of items in CPI minus oil and food) rose by over 9 per cent for many months in FY 05. SBP accuses FBS of incompetence and gives estimates of ‘core’ inflation, which are downright lies. In SBP formulas ‘core’ inflation should be estimated by ‘trimming’ price volatility (removing from the calculations ten per cent of ‘extreme’ price volatility) and removing from the ‘core’ index not only food and oil but also gas, electricity and CNG. By this statistical fraud the ‘core’ inflation index dropped from 9 per cent to 7.9 per cent (a fall of 14.1 per cent) in June 2005. There are no grounds for excluding gas and electricity from ‘core’ inflation, as these prices are not subject to exceptional volatility. This statistical fraud was undertaken purely to justify the maintenance of the discount rate at a level below inflation.
The monetary policy resulted in victimising the poor, and subsidise the rich who can continue to borrow at negative real rates of interest.
Moreover, these adjustments to core inflation estimates exclude almost fifty per cent of the total weightage of the CPI expenditure basket. The SBP effectively admits that its policy can have no effect on 50 per cent of your total consumption expenditure. This is an explicit admission of the abject failure of market based monetary policy-and of policy liberalisation in general-as a means for countering inflation in Pakistan.
Nor can the voodoo monetarism as practised by SBP ‘experts’ have any impact on the distributional injustices generated by inflation. Table 3.4 of the SBP Report shows that prices of goods consumed by those with income less than Rs 3000 per month rose by 10.2 per cent during FY 05 while prices for income groups above Rs 12000 rose by only 8 per cent. For the rich-those with incomes above Rs. 100,000 per month the price rise is trivial. What does it matter to someone with a monthly income of Rs100,000 if potatoes cost Rs18 a kilo. The share of potatoes in his expenditure basket is only 0.03 per cent.
Voodoo monetarism cannot modify such distributional inequities. The ham handed ‘experts’ at SBP have no clue with regard to the transmission mechanisms linking price changes to change in monetary aggregates - this is evident from the cavalier claims of inflation ‘moderating’ in the second half of FY 05 or the first two months of FY 06 (p 52-54). These ‘experts’ are quite unable to justify the SBP expectation that CPI increase will average 8 per cent during FY 06. The SBP price forecast for FY 05 was exceeded by 86 per cent. If the same difference between SBP forecast and realised inflation is maintained CPI will rise by 15 per cent during FY 06.
In justifying its monetary policy initiatives the SBP voodoo experts rely exclusively on the theoretical paradigms of the Neo Con American disciples of Lucas and Sargant-they have never heard of the work done in monetary and financial theory by Post Keynesians, let alone the radical post structuralist theorists of Latin America.
Thus the discussion on the ‘trade off’ between inflation and growth (p99-100) is presented with a straight face for the SBP analysts are completely unaware of the hatchet job done on this theoretical nonsense by Argentinean and Brazilian economists since 2000. The SBP should have considered: why doesn’t the European Central Bank tolerate levels of inflation above 2 per cent if this has a benign effect on growth. But practicing voodoo requires you to shut your eyes to the real world.
The failure of the ‘aggressive tightening’ of monetary policy that the SBP is claimed to have instituted during the second half of FY 05 cannot be denied. Lending rates did not rise despite the rise in the six-month cut off rate in the second half of FY 05-lending rates continued to remain below inflation, which means that SBP continues to provide an implicit subsidy to the rich. Subsidising the rich is the unalterable main objective of SBP monetary policy-its raison d’etre.
Private sector credit growth actually accelerated during the second half of FY 05 as a response to SBP’s "aggressive tightening" and the increase in the discount rate, greater OMO absorptions, deceleration of reserve money growth, higher levels of TB acceptances and increase in discounting activities. The SBP admits ‘aggressive tightening cannot ensure the containing of inflationary pressure given the carry forward liquidity over hang from the preceding three years". (p 102). Question: who created this "liquidity overhang", Answer the SBP.
The SBP pins its hopes on "managing the expectations of stake holders and establishing its credibility" (p 102). But the SBP does not tell us how its credibility will be enhanced. In Box 5.3 (p 103) it presents a potted caricature of Neo-Con monetarism including statements such as "in every economy monetary policy works essentially through its influences on demand". In Cuba? In Iran? In Venezuela? In China? Even in Mitterand’s France? Did credit planning and interest rates "suppression" never seek to "influence" aggregate supply? The contents of this Box show that the SBP’s contempt for econometric research undertaken in Pakistan is costing it dearly. Extensive work has been undertaken at PIDE, AERC and CBM to identify transmission mechanisms linking changes in monetary aggregates to prices, production and investment. A near consensus has been established among the researchers that the preconditions for the effectiveness of market based monetary policy do not exist in Pakistan. While the demand for real money balances (both high powered money and M2) is interest inelastic so also is investment demand. Varying the interest rate and money supply has little impact on investment in Pakistan. Empirical evidence shows that monetary policy since 1988 the liberalisation era) has been accommodative and reactionary in the sense that it merely shifts monetary aggregates to international and fiscal policy preferences. Credit planning and financial sector nationalisation, therefore remain a categorical imperative both for sustaining growth and moderating inflation in Pakistan and the systemic credibility of the SBP cannot be enhanced whatever the fantasies of its voodoo experts as long as market based monetary policy continues.
Exhibit A shows that the market credibility of the SBP is virtually nonexistent even in terms of monetary aggregates.
Deviation between targets and outcomes range between +73 per cent to - 154 per cent. The SBP has lost control over interest rates and over both components of money (NDA and NFA). Monetary expansion during FY 05 exceeded the SBP target by 33 per cent. Negative real interest rates continued to persist in the second half of FY 05 despite SBP’s "aggressive tightening." NFA of scheduled banks grew by 62.5 per cent during FY 05 while that of SBP contracted. Commodity financing exceeded SBP targets by as mush as 340 per cent.
Clearly, credit planning has become a farce and the SBP basis its apologies on Neo Con monetarist analysis. It admits that targeting cannot be improved and that in future targets ‘will be tied with certain constraints" (p 107) so that the SBP can pass on the blame for missed targets to the Ministry of Finance.
Exhibit A shows that SBP has no adequate conception of economics dynamics in Pakistan. Its multi sectoral forecast models are not worth the paper they are printed on. In these circumstances monetary policy is necessarily inefficient-caused in a Granger sense by movements in variables outside ambit combat of monetary policy. If the SBP is encouraging consumer financing, negative borrower interest rates, excessive credit expansion to the textile sector, this is because the textile tycoons, the upper middle income groups and financier interests have seized power and are - at least not yet - aware of any systemic threat to their monopoly of state power. The SBP cannot change monetary policy until either those groups are politically ousted or else a sense of impending crisis impels them to surrender some of their loot and plunder. It is in this sense that monetary policy is endogenously determined.
Exhibit B shows the extent of the domination of the rich (the mutrafeen) over Pakistani’s financial system. The mutrafeen - those having investment accounts of Rs10 million and above - constitute less than 0.04 per cent of total investment account holders but they obtain about 65 per cent of all bank credit. The mustadafeen - with investment accounts lower than Rs1-lakh - represent 57 per cent of all investment account holders but their share of total bank credit is a shameful 0.08 per cent. The mustadafeen - constitute over 56 per cent of bank deposit holders but their share of total bank deposits is entirely at the disposal of the mutrafeen. Deposits of the mustadafeen equalled Rs6845 billion but credit obtained by them was only about Rs10 billion in June 2005 - thus about Rs6735 billion (98 per cent of total mustadafeen deposits) was available for lending to the mutrafeen whose borrowing from banks exceeded their total bank deposits by about 45 per cent in FY 05.
The SBP’s talk of decline in credit concentration (p 109-110)-calculation of the Harfindahl index on the sectoral distribution of bank credit - is a cruel joke on the poor. During the Musharraf era credit concentration has increased relentlessly and the share of the poor has declined in bank credit in every year since FY 99. Bank services have become exorbitantly expensive and are simply not available to the majority of the population. Less than one fifth of the country’s population are bank deposit holders and there are about 20 per cent fewer bank branches today than in 1998 when the population was about 80 million. The bank branch to population ratio of Pakistan is among the lowest in the world and has been falling inexorably due to Musharraf’s privatisation.
To speak of the "achievement" of crisis-ridden shoestring operations-such as Khushali Bank, SME Bank and First Women’s Bank - in the face of figures such as these reflects the callous shamelessness and hypocrisy of the SBP voodoo experts. Due to adoption of market based monetary policy and financial sector privatisation; the banking sector has become a major instrument for the exploitation of the poor. Banks lend exclusively to the rich and their exorbitant profits are derived either from the miserable deposit rates they offer or from risky top of the market transactions. SBP claims a significant decline in the net non-performing loans (NPL) to net advances ratio but does not provide details of cash collections and loan rescheduling as components of NPL reductions. SBP has been extremely lenient in sanctioning write offs and even more massive rescheduling in FY 2005. The continuing rise of the money multiplier - from 2.79 in FY 00 to 3.26 in FY 05 shows the increased dominance of the monetary system by the deposit taking institutions and mirrors the systemic weakness of the SBP. Money market operations of the SBP are reactive and accommodative and its capability to determine money market outcomes is weaker than ever before. As we have seen the "aggressive tightening " of the second half of FY 05-reflected in a rise in the discount rate; introduction of shorter term OMOs and associated TB auctions, etc-was entirely ineffective. There was acceleration in private sector credit in the second half of FY 05 and lending rates remained negative.
Most significantly four PIB auctions were cancelled and the Pakistan Investment Bond, which had been introduced with such fan-fair a few years ago, "to serve as a bench mark for long term interest rates" died without even a whimper. The SBP has acknowledged its failure to influence long-term trends primarily because it sees no future for financing at the long end of the market in Pakistan. SBP has also shown itself to be incapable of dampening volatility in the inter-bank rate during FY 05. There was a marked reduction of secondary market activity, particularly at the long end of the market in FY 05.
The rise in the banking sector’s after tax profit to assets ratio, which rose from 1.2 per cent to 1.4 per cent in FY 05 was mainly due to a 17.5 per cent (111 basis point) increase in the spread between average lending and average deposit rates. The average lending rate rose by 155 basis points (but were 0.5 per cent lower than the CPI growth rate) in FY 05 while the average deposit interest rose by only 38 basis points. At end FY 05 the average deposit rate was only 1.37 per cent, 8 per cent lower than the CPI index for FY 05. The increased profitability of the banks was thus entirely due to the intensified exploitation of the depositors, specially the poor.
As Exhibit C shows during Ishrat Hussain’s governorship SBP has lost over Rs51 billion in exchange rate transactions. These losses have been incurred even in years when global interest rates rose and the rupee depreciated.
Compounding this incompetent mismanagement of the domestic money market and the wastage of the country’s foreign exchange resources is the intolerable increase in SBP establishment expenditure during Ishrat Hussain’s governorship. During 2004-2005 salary expenses increased by 12.8 per cent, legal and professional charges rose by over 400 per cent and staff conveyance charges by 53 per cent.
The 40 per cent increase in operating expenses during FY 05 is attributed to increase in fees of the "fund managers and custodians" (Vol II p 101), who are mismanaging our foreign exchange resources. Once again no detail regarding this fees increase is provided in the notes to the Accounts and Auditors’ fees increased by 16.5 per cent.
Demoralised by the pampering of outsiders 45 officials have resigned during 2004-2005. With the departure of M.A Janjua the old patriotic professional leadership of the SBP has been comprehensively decimated.
Money supply growth is out of control, rampant conspicuous consumption growth is stifling saving and investment by food inflation is growing, national saving rates have fallen to their lowest level in ad decade and is fuelling unsustainable import growth. Investment in real physical assets is falling and bloated land values and financial asset prices are making the financial system crisis prone. The botched privatisation of PTCL and KESC shows lack of investor confidence in the real sector.
The poor are the main victims of this bigoted doctrinaire neo con monetarism. The savings of the poor are being transferred to the rich and they have virtually no access to institutional credit (see Exhibit B). The marginalisation of the poor is graphically illustrated by the financial impact of the country’s most serious natural disaster. A hundred thousand achieved martyrdom and more than a million became homeless but the Karachi Stock Exchange continues to boom and there is virtually no impact on any segment of the money market.
If the principle victims of market based monetary policy are the poor people of Pakistan, America’s is its main beneficiary. Financial sector liberalisation -specially capital account liberalisation - allows it to dominance Pakistan’s economy as never before.
Sooner, rather than later, a popular Islamic government will abandon market based monetary policy re-institute rigorous credit planning, re-impose strict credit controls, re-nationalise all financial institutions and seek the creation of a common currency area by linking the Pak rupee to the Chinese Yuan. "Thus will shine the dawn".
When Dr. Ishrat Hussain assumed charge as SBP Governor he had just published a book entitled Pakistan: the Economy of an Elitist State. One expected this ex-chemistry teacher to use monetary policy initiatives for improving the lot of the poor but the poor have been the main victims of the immiserising monetarism that has been practised during FY 2000 to FY 2005.
Monetary policy failure is reflected first of all in a drastic fall in national savings. National savings fell from 18.7 per cent of GDP in FY 04 to 15.1 per cent in FY 05. Public savings have been almost totally eliminated. They fell by 17 per cent in FY 05 and now equal only about 2 per cent of GDP. Government saving fell by over 32 per cent. Private savings fell by 10 per cent in FY 04 and a further 1.5 per cent in FY 05. Household saving fell by 10 per cent in FY 04 and by 3 per cent in FY 05. The national saving to GDP ratio equalled 21 per cent in FY 03. The value of this ratio has fallen by over 25 per cent during FY 03 to FY 05.
The decline in saving has been accompanied by a relative decline in investment, gross total investment fell from 18.6 per cent of GDP in FY 04 to 17.9 per cent in FY 05 gross fixed investment fell from 16.8 per cent to 16.2 per cent Private investment remained flat at 11.6 per cent in both FY 04 and FY 05. Public investment, like public savings, is disappearing altogether. It now accounts for only about 4 per cent of GDP. As the SBP Report acknowledges "Pakistan is placed at the bottom among (Asian) countries" on this basis (P56). The investment to GDP ratio is 44 per cent in China, 30 per cent in South Korea and 23 per cent in both India and Bangladesh (SBP 2005, Table 2.39).
The decline is savings and investment is directly a consequence of monetary policy orientation. SBP’s monetary policy encourages consumption financing and speculative capital expenditure leading to bloated asset prices and unsustainable consumption expenditures. It discourages fixed capital formation. Real investment fell by 4.4 per cent in FY 04 and grew by only 1.5 per cent in FY 05 when real GDP grew by 8.4 per cent.
SBP’s failure is even more glaringly reflected in the rapidly deteriorating price situation. In its 2004 Annual Report SBP had forecast a 5 per cent growth in CPI for FY 05 - infact CPI rose by 9.3 per cent casting serious doubt on the SBP’s credibility. The CPI increase was entirely due to domestic factors such as food prices and house rents and not due to an escalation of the price of oil. SBP acknowledges the ineffectiveness of its monetary policy to have any impact on food prices and house rents (p 65) and argues that administrative measures alone can moderate these prices. This is an admission of the unsuitability of policy liberalisation and market based monetary management as an instrument for containing inflation in Pakistan. Food inflation during FY 05 averaged 12.5 per cent, higher than in any year since 1995. Price increases in the non-food components of CPI doubled in FY 05 (7.2 per cent) compared to FY 04 (3.6 per cent). House rents rose by 11.3 per cent in FY 05 compared to 4.5 per cent in FY 04.
According to FBS estimates core inflation (prices of items in CPI minus oil and food) rose by over 9 per cent for many months in FY 05. SBP accuses FBS of incompetence and gives estimates of ‘core’ inflation, which are downright lies. In SBP formulas ‘core’ inflation should be estimated by ‘trimming’ price volatility (removing from the calculations ten per cent of ‘extreme’ price volatility) and removing from the ‘core’ index not only food and oil but also gas, electricity and CNG. By this statistical fraud the ‘core’ inflation index dropped from 9 per cent to 7.9 per cent (a fall of 14.1 per cent) in June 2005. There are no grounds for excluding gas and electricity from ‘core’ inflation, as these prices are not subject to exceptional volatility. This statistical fraud was undertaken purely to justify the maintenance of the discount rate at a level below inflation.
The monetary policy resulted in victimising the poor, and subsidise the rich who can continue to borrow at negative real rates of interest.
Moreover, these adjustments to core inflation estimates exclude almost fifty per cent of the total weightage of the CPI expenditure basket. The SBP effectively admits that its policy can have no effect on 50 per cent of your total consumption expenditure. This is an explicit admission of the abject failure of market based monetary policy-and of policy liberalisation in general-as a means for countering inflation in Pakistan.
Nor can the voodoo monetarism as practised by SBP ‘experts’ have any impact on the distributional injustices generated by inflation. Table 3.4 of the SBP Report shows that prices of goods consumed by those with income less than Rs 3000 per month rose by 10.2 per cent during FY 05 while prices for income groups above Rs 12000 rose by only 8 per cent. For the rich-those with incomes above Rs. 100,000 per month the price rise is trivial. What does it matter to someone with a monthly income of Rs100,000 if potatoes cost Rs18 a kilo. The share of potatoes in his expenditure basket is only 0.03 per cent.
Voodoo monetarism cannot modify such distributional inequities. The ham handed ‘experts’ at SBP have no clue with regard to the transmission mechanisms linking price changes to change in monetary aggregates - this is evident from the cavalier claims of inflation ‘moderating’ in the second half of FY 05 or the first two months of FY 06 (p 52-54). These ‘experts’ are quite unable to justify the SBP expectation that CPI increase will average 8 per cent during FY 06. The SBP price forecast for FY 05 was exceeded by 86 per cent. If the same difference between SBP forecast and realised inflation is maintained CPI will rise by 15 per cent during FY 06.
In justifying its monetary policy initiatives the SBP voodoo experts rely exclusively on the theoretical paradigms of the Neo Con American disciples of Lucas and Sargant-they have never heard of the work done in monetary and financial theory by Post Keynesians, let alone the radical post structuralist theorists of Latin America.
Thus the discussion on the ‘trade off’ between inflation and growth (p99-100) is presented with a straight face for the SBP analysts are completely unaware of the hatchet job done on this theoretical nonsense by Argentinean and Brazilian economists since 2000. The SBP should have considered: why doesn’t the European Central Bank tolerate levels of inflation above 2 per cent if this has a benign effect on growth. But practicing voodoo requires you to shut your eyes to the real world.
The failure of the ‘aggressive tightening’ of monetary policy that the SBP is claimed to have instituted during the second half of FY 05 cannot be denied. Lending rates did not rise despite the rise in the six-month cut off rate in the second half of FY 05-lending rates continued to remain below inflation, which means that SBP continues to provide an implicit subsidy to the rich. Subsidising the rich is the unalterable main objective of SBP monetary policy-its raison d’etre.
Private sector credit growth actually accelerated during the second half of FY 05 as a response to SBP’s "aggressive tightening" and the increase in the discount rate, greater OMO absorptions, deceleration of reserve money growth, higher levels of TB acceptances and increase in discounting activities. The SBP admits ‘aggressive tightening cannot ensure the containing of inflationary pressure given the carry forward liquidity over hang from the preceding three years". (p 102). Question: who created this "liquidity overhang", Answer the SBP.
The SBP pins its hopes on "managing the expectations of stake holders and establishing its credibility" (p 102). But the SBP does not tell us how its credibility will be enhanced. In Box 5.3 (p 103) it presents a potted caricature of Neo-Con monetarism including statements such as "in every economy monetary policy works essentially through its influences on demand". In Cuba? In Iran? In Venezuela? In China? Even in Mitterand’s France? Did credit planning and interest rates "suppression" never seek to "influence" aggregate supply? The contents of this Box show that the SBP’s contempt for econometric research undertaken in Pakistan is costing it dearly. Extensive work has been undertaken at PIDE, AERC and CBM to identify transmission mechanisms linking changes in monetary aggregates to prices, production and investment. A near consensus has been established among the researchers that the preconditions for the effectiveness of market based monetary policy do not exist in Pakistan. While the demand for real money balances (both high powered money and M2) is interest inelastic so also is investment demand. Varying the interest rate and money supply has little impact on investment in Pakistan. Empirical evidence shows that monetary policy since 1988 the liberalisation era) has been accommodative and reactionary in the sense that it merely shifts monetary aggregates to international and fiscal policy preferences. Credit planning and financial sector nationalisation, therefore remain a categorical imperative both for sustaining growth and moderating inflation in Pakistan and the systemic credibility of the SBP cannot be enhanced whatever the fantasies of its voodoo experts as long as market based monetary policy continues.
Exhibit A shows that the market credibility of the SBP is virtually nonexistent even in terms of monetary aggregates.
Deviation between targets and outcomes range between +73 per cent to - 154 per cent. The SBP has lost control over interest rates and over both components of money (NDA and NFA). Monetary expansion during FY 05 exceeded the SBP target by 33 per cent. Negative real interest rates continued to persist in the second half of FY 05 despite SBP’s "aggressive tightening." NFA of scheduled banks grew by 62.5 per cent during FY 05 while that of SBP contracted. Commodity financing exceeded SBP targets by as mush as 340 per cent.
Clearly, credit planning has become a farce and the SBP basis its apologies on Neo Con monetarist analysis. It admits that targeting cannot be improved and that in future targets ‘will be tied with certain constraints" (p 107) so that the SBP can pass on the blame for missed targets to the Ministry of Finance.
Exhibit A shows that SBP has no adequate conception of economics dynamics in Pakistan. Its multi sectoral forecast models are not worth the paper they are printed on. In these circumstances monetary policy is necessarily inefficient-caused in a Granger sense by movements in variables outside ambit combat of monetary policy. If the SBP is encouraging consumer financing, negative borrower interest rates, excessive credit expansion to the textile sector, this is because the textile tycoons, the upper middle income groups and financier interests have seized power and are - at least not yet - aware of any systemic threat to their monopoly of state power. The SBP cannot change monetary policy until either those groups are politically ousted or else a sense of impending crisis impels them to surrender some of their loot and plunder. It is in this sense that monetary policy is endogenously determined.
Exhibit B shows the extent of the domination of the rich (the mutrafeen) over Pakistani’s financial system. The mutrafeen - those having investment accounts of Rs10 million and above - constitute less than 0.04 per cent of total investment account holders but they obtain about 65 per cent of all bank credit. The mustadafeen - with investment accounts lower than Rs1-lakh - represent 57 per cent of all investment account holders but their share of total bank credit is a shameful 0.08 per cent. The mustadafeen - constitute over 56 per cent of bank deposit holders but their share of total bank deposits is entirely at the disposal of the mutrafeen. Deposits of the mustadafeen equalled Rs6845 billion but credit obtained by them was only about Rs10 billion in June 2005 - thus about Rs6735 billion (98 per cent of total mustadafeen deposits) was available for lending to the mutrafeen whose borrowing from banks exceeded their total bank deposits by about 45 per cent in FY 05.
The SBP’s talk of decline in credit concentration (p 109-110)-calculation of the Harfindahl index on the sectoral distribution of bank credit - is a cruel joke on the poor. During the Musharraf era credit concentration has increased relentlessly and the share of the poor has declined in bank credit in every year since FY 99. Bank services have become exorbitantly expensive and are simply not available to the majority of the population. Less than one fifth of the country’s population are bank deposit holders and there are about 20 per cent fewer bank branches today than in 1998 when the population was about 80 million. The bank branch to population ratio of Pakistan is among the lowest in the world and has been falling inexorably due to Musharraf’s privatisation.
To speak of the "achievement" of crisis-ridden shoestring operations-such as Khushali Bank, SME Bank and First Women’s Bank - in the face of figures such as these reflects the callous shamelessness and hypocrisy of the SBP voodoo experts. Due to adoption of market based monetary policy and financial sector privatisation; the banking sector has become a major instrument for the exploitation of the poor. Banks lend exclusively to the rich and their exorbitant profits are derived either from the miserable deposit rates they offer or from risky top of the market transactions. SBP claims a significant decline in the net non-performing loans (NPL) to net advances ratio but does not provide details of cash collections and loan rescheduling as components of NPL reductions. SBP has been extremely lenient in sanctioning write offs and even more massive rescheduling in FY 2005. The continuing rise of the money multiplier - from 2.79 in FY 00 to 3.26 in FY 05 shows the increased dominance of the monetary system by the deposit taking institutions and mirrors the systemic weakness of the SBP. Money market operations of the SBP are reactive and accommodative and its capability to determine money market outcomes is weaker than ever before. As we have seen the "aggressive tightening " of the second half of FY 05-reflected in a rise in the discount rate; introduction of shorter term OMOs and associated TB auctions, etc-was entirely ineffective. There was acceleration in private sector credit in the second half of FY 05 and lending rates remained negative.
Most significantly four PIB auctions were cancelled and the Pakistan Investment Bond, which had been introduced with such fan-fair a few years ago, "to serve as a bench mark for long term interest rates" died without even a whimper. The SBP has acknowledged its failure to influence long-term trends primarily because it sees no future for financing at the long end of the market in Pakistan. SBP has also shown itself to be incapable of dampening volatility in the inter-bank rate during FY 05. There was a marked reduction of secondary market activity, particularly at the long end of the market in FY 05.
The rise in the banking sector’s after tax profit to assets ratio, which rose from 1.2 per cent to 1.4 per cent in FY 05 was mainly due to a 17.5 per cent (111 basis point) increase in the spread between average lending and average deposit rates. The average lending rate rose by 155 basis points (but were 0.5 per cent lower than the CPI growth rate) in FY 05 while the average deposit interest rose by only 38 basis points. At end FY 05 the average deposit rate was only 1.37 per cent, 8 per cent lower than the CPI index for FY 05. The increased profitability of the banks was thus entirely due to the intensified exploitation of the depositors, specially the poor.
As Exhibit C shows during Ishrat Hussain’s governorship SBP has lost over Rs51 billion in exchange rate transactions. These losses have been incurred even in years when global interest rates rose and the rupee depreciated.
Compounding this incompetent mismanagement of the domestic money market and the wastage of the country’s foreign exchange resources is the intolerable increase in SBP establishment expenditure during Ishrat Hussain’s governorship. During 2004-2005 salary expenses increased by 12.8 per cent, legal and professional charges rose by over 400 per cent and staff conveyance charges by 53 per cent.
The 40 per cent increase in operating expenses during FY 05 is attributed to increase in fees of the "fund managers and custodians" (Vol II p 101), who are mismanaging our foreign exchange resources. Once again no detail regarding this fees increase is provided in the notes to the Accounts and Auditors’ fees increased by 16.5 per cent.
Demoralised by the pampering of outsiders 45 officials have resigned during 2004-2005. With the departure of M.A Janjua the old patriotic professional leadership of the SBP has been comprehensively decimated.
Money supply growth is out of control, rampant conspicuous consumption growth is stifling saving and investment by food inflation is growing, national saving rates have fallen to their lowest level in ad decade and is fuelling unsustainable import growth. Investment in real physical assets is falling and bloated land values and financial asset prices are making the financial system crisis prone. The botched privatisation of PTCL and KESC shows lack of investor confidence in the real sector.
The poor are the main victims of this bigoted doctrinaire neo con monetarism. The savings of the poor are being transferred to the rich and they have virtually no access to institutional credit (see Exhibit B). The marginalisation of the poor is graphically illustrated by the financial impact of the country’s most serious natural disaster. A hundred thousand achieved martyrdom and more than a million became homeless but the Karachi Stock Exchange continues to boom and there is virtually no impact on any segment of the money market.
If the principle victims of market based monetary policy are the poor people of Pakistan, America’s is its main beneficiary. Financial sector liberalisation -specially capital account liberalisation - allows it to dominance Pakistan’s economy as never before.
Sooner, rather than later, a popular Islamic government will abandon market based monetary policy re-institute rigorous credit planning, re-impose strict credit controls, re-nationalise all financial institutions and seek the creation of a common currency area by linking the Pak rupee to the Chinese Yuan. "Thus will shine the dawn".
posted by Alghazalians at 7:30 PM
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