Change seems to be the consistent state atop important institutions with head-shuffles at foreign, information, power, petroleum and finance ministries now being mimicked by change of guard at the SBP. And while specifics of Dr Kardar’s resignation are better left for more appropriate space, his confrontation with certain government circles betrayed concerning limitations to central bank autonomy, which is where most of Mr Yasin’s energies should now be invested in. The new governor’s international banking experience is impressive. But we have already played host to a super-banker driven, hot-money centred policy mix before, with painfully obvious results. And even though he has played acting-governor before, it is his recent bulky interest rate reduction, in sharp contrast to Dr Kardar’s more hawkish outlook on inflation, that is more telling with regard to both policy direction and the bank’s independence. With chronic power shortage and far from comfortable inflation levels, the government seems to be the biggest immediate beneficiary of the easier money outlook, not industrial production or private sector investors. Yet despite his apparent easy gelling with Islamabad’s debt-addicted posture, he will quickly have to take a leaf out of his predecessor’s book and aggressively halt the rupee’s fast fall, or risk compromising the economy’s lifeline by making loan repayment harder. That Mr Yasin is the fourth SBP governor in the government’s three-and-a-half years in power speaks loudly about policy implementation and continuation inefficiencies. The economy is already faltering because of unbearable exogenous strains. When central banks enforce influenced monetary policies, driven mainly to fund non-productive government borrowing, their printing presses unleash devastating inflation, especially when low growth and weak employment fail to trigger consumer activity. We will know very quickly which direction the new governor is about to steer the SBP towards. If he does not immediately assert SBP autonomy, the fourth change will be about just as good, at least in terms of results, as the previous three.
Market sentiment may well be fickle, and the bear hug on the KSE will likely fizzle out sooner rather than later, but far deeper issues have come to the fore as the Saudi bombshell – to dump stakes in HUBCO – rattles the bourse in the immediate term. Citing circular debt and rupee nosedive concerns, Jeddah based Xenel Industries has now unnerved international observers just as the government of Pakistan was posturing towards an accommodative monetary environment to attract local as well as foreign investment, crucially needed to stimulate growth and ease unemployment. We have repeatedly warned that both circular debt and rupee weakening will wrongfoot the government’s initiatives. True, the monetary situation must ease to undo unfair private sector crowding out. But with chronic power shortage and a constantly depreciating rupee, efforts at attracting investment absent essential institutional and infrastructural upgradation amount to putting the cart before the horse. The Saudi ditch confirms fears that serious investors will not accept these measures at face value. Relevant authorities will need to put the muscle where the mouth is, and ensure on-ground progress if the easing exercise is to bear fruit. There can be no two views on the circular debt and subsequent energy shortage issue. That a credible, lasting solution continues to evade authorities reflects poorly on their appreciation of the issue’s centrality to the economic/social/political mix. The rupee, too, has depreciated significantly against the dollar in an environment when the greenback has steadily deflated, barring increasingly rare windows of risk appetite triggered by monetary rhetoric in the west, reflecting extremely weak fundamentals. If these problems are not addressed, or at least taken up far more seriously at the highest level, HUBCO will be just the tip of the iceberg. Dark clouds have been gathering on the economic front for quite some time now. It appears that they might not be too far from unleashing a debilitating torrent on the economy. We hope authorities will draw the right lessons from this episode, and ensure there will be no re-runs.
Provided the prime minister’s inauguration of the Diamer-Bhasha dam is not a repeat performance of previous stalled attempts to get the ball rolling on the country’s largest multi-purpose reservoir and hydel power generation unit, it will mark a crucial turning point for the mismanaged power sector. Predominantly agrarian and officially ‘highly water stressed’, Pakistan’s economy faces imminent collapse failing immediate government intervention to address chronic structural problems. As we have noted, deepening water scarcity is snowballing into a national economic emergency. That the country’s irrigated area has increased a little under 20 per cent over the last two decades, yet water shortage has consistently cut yields in the most significant crops – cotton, wheat, rice, sugarcane – is proof enough of unforgivable ineffectiveness of the official machinery. The negative yield trend is indicative of low official priority for both exports and subsistence, since principal revenue generation stems from the crucial agri-industry. In simple terms, rapidly increasing population and decreasing water availability has not been factored in by decision makers. But with the economy now near breakdown, relevant ministries will have to devise means of jumping ahead of the curve, or declining yields will put added pressure on already strained urban centres, upsetting an already fragile rural-urban population mix. It bears noting that a wave of positive news has caused optimism of late, even if some measures should have been initiated immediately after the budget instead of one quarter into the new fiscal. The central bank’s interest rate incentive for private sector expansion, proactive government posturing to stimulate foreign trade and investment, among others, are right steps for a quantum jump in GDP growth necessary to snap out of stagflation. Yet chronic power shortage, made worse by water scarcity, will compromise any efforts aimed at enhancing productivity or agri output. The government is reminded that economic revival cannot be pursued in isolation. The push for growth must accommodate all crucial players, which mandates overcoming infrastructural inadequacies prior to initiating landmark projects.
The recent Pak-Japan MoU to strengthen bilateral investment is indicative of saner heads finally prevailing in decision-making circles. Recent developments, though seemingly isolated incidents, actually tell of attempts to put a cohesive growth narrative in place, realising the importance of increased investment, both indigenous and foreign, to break off of the choking cycle of stagflation we find ourselves in. It was only natural for different pieces of the puzzle to fall into place once the central bank allowed increased liquidity by relaxing the interest rate regime. Immediately, KESC unveiled an ambitious program of attracting serious investment parties to help exploit Thar coal reserves, lighten burden on furnace oil demand, reduce strain on electricity supplies and help push down high prices. Concerned quarters must now identify areas where targeted – and facilitated – investment can alter the low-growth status quo. The coming together of Japan and Pakistan, when both economies are struggling to find high growth, presents the ideal example to follow in uncertain times. Pakistan’s economy has been stagflated for the last half decade, with consumer spending dried by increasing unemployment and rising prices. Japan, stagnant for two decades, has been put horribly off course by the recent tsunami, at a time when global uncertainty drove up the yen and compromised the only feather in Tokyo’s cap – exports. Going forward, step number one will obviously be identifying bottlenecks to incremental increases in production and subsequently trade earnings. With regard to Pakistan, this will mean revisiting the security debate, in addition, of course, to reducing bureaucratic red tape, etc. Also important will be the government’s own position, compromised as it is because of its debt binges and resort to printing money. Simply put, prompting investment for pick-up in growth is right, but that will require the government to trim excesses and play facilitator to local and foreign investment, an exercise with no room for complacency, corruption and adhocism.
That the ministry of water and power embarrassed itself, and the country, when a ministerial level delegation went unprepared to an MoU signing with Kyrgyz, Tajik and Afghan counterparts, is simply unacceptable. That such an episode should transpire on the heels of the country’s worst power crisis is a disturbing indication of the position of the people’s, and the economy’s, most pressing concern on the government’s priority list. It’s not just the matter of a simple oversight. The present power situation, and its impact on people’s lives, economic growth and export earnings, ought to have made the government thoroughly investigate all possible avenues of ensuring future supplies. And since the CASA project is hardly a novel idea, the government was expected to have completed its homework some time ago. Considering the present dispensation’s attitude, it is little surprise that we are behind the curve in the Iran-Pakistan project also. Relevant authorities must take this opportunity to streamline appropriate procedure. Energy concerns must take top priority, along with ensuring the country’s security. The government is reminded that improving the energy situation is necessary not only from a social and economic standpoint, but bears heavily on its political fortunes also.
The state bank rate cut, though larger than immediate expectations, must be the first of a series of steps to ensure money market bottlenecks are removed and the private sector is incorporated in the growth narrative. One, the rate must be periodically revised downward till it settles in the 7-8 per cent range to provide needed buoyancy to growth and employment. Two, targeted fiscal expansion must accompany the monetary easing, bolstering infrastructure and easing unemployment. Three, government debt monetisation that compromised the high interest rate environment must cease and SBP autonomy guaranteed, both by monetary and fiscal authorities. Four, since the easing follows a subtle softening of inflation, relevant authorities must ensure artificial price hikes are not allowed to induce artificial inflationary tendencies, derailing the monetary trajectory just as it gathers pace. As noted in this space recently, imminent gas shortage has already pushed the fertiliser industry to warn of urea shortage and subsequent food inflation. Considering the interest rate easing, we feel compelled to warn the government that failure to arrest the trend in time, as in the case of electricity shortage, will not only induce another unnatural price hike, but also mandate a painful rethink of the easing cycle, wrongfooting private sector expansion yet again. What such a scenario will do to foreign investment is simple. Policy inconsistency sounds the death rattle for sovereigns with regard to market sentiment. It may take more than the SBP and finance ministry to ensure smooth continuation of rate reduction. We have noted instances of market heavyweights posturing towards cartelisation, threatening price hikes in essential commodities to bend relevant authorities to their demands. Therefore, the SECP will also have to come to the fore. Presently under a progressive and serious-minded leadership, the regulator should not disappoint considering the importance of the train of events set in motion by Saturday’s generous cut. The state bank has definitely taken the right step, but a lot remains to be done, and success will need sincerity of purpose from all concerned.