Random Musings on Economy Part – I
Curse of Banking Spread
In the year 2008 the banking spread or rate difference between what banks pay as interests to depositors and what they charge on loans to business was 7.05 % which was the highest in the world . The banking spread in the US at that time was 1.3 %, 1.7 % in Japan, in India 3.1 % , Sri Lanka 4.4 % and 5.5 % in Nepal. Today the State Bank of Pakistan in a bid to control runaway inflation has raised the interest rate on deposits in banks to 22 % which is beneficial for depositors but disastrous towards project financing. At one stage the lending portfolio of banks to the government went upto 75 % with ensured rates of return . The banks did not have to bother about retail customers and borrowers .Economic indicators that underwent economic deterioration since 1999 to 2008 saw the trade deficit increasing from US $ 2.08 to US$ 20.74 billion and external debt reaching US $ 46 billion from US $ 37.6 billion. Pakistan’s economy became a consumer economy.Pakistani industry even stopped indigenous manufacturing of bicycles. Pakistan’s exports , mainly of textile, are import reliant and as rupee value eroded against the US dollar exports remained stagnant. Real estate values mainly rose in terms of rupee depreciation . As of today remittances are sharply falling as Western economies are offering high interest rates on deposits in banks.
Optic of GDP growth
In the year 2008 the corporate sector was no longer allowed to invest in national and governments savings. Nationals savings were highly taxed and interest rates slashed which saw a flight of money from banks and savings to real estate and stock exchange where speculators manipulated the markets. An illusion of GDP growth and enhanced revenues was projected based on skyrocketing inflation. No IPO has been launched on bourses in Pakistan in a decade and thus no additional capitalisation has taken place on the stock markets. Cost of doing business at seaports gradually increased after privatisation and outsourcing of public sector assets and insertion of exclusivity clauses in international agreements. The sooner the myth of existence of a huge informal or ” black ” is shattered the better. No sizeable informal economy can exist in an environment of low productivity .
Energy and Power Sector
Fossil fuel and coal constitute a significant portion of imports . Instead of exploring indigenous fossil fuel potential LNG is imported which enriches the source country but makes the recipient country poorer. Refineries were not upgraded and even refined petroleum products imported. Naptha is exported as no petrochemical refinery exists. Theft of electricity and gas from the utility companies remained high and same was passed on to hapless customers as line losses with the connivance of regulators . Power plants were run on furnace oil , diesel and coal mostly imported. Coal powered power plants were constructed at huge distances from seaports which entailed huge transportation costs besides environmental damages. Surprisingly the locally produced Thar coal electricity tariff is the highest in the country. Energy security is compromised as fuel storage is limited to a few days supply and this causes disruption in the fuel supply chain and price volatility as well. Lack of storage for crude and grains at ports escalate demurrage charges which is payable in foreign exchange .Electricity generation through solar and wind power , components of which are imported , should be permitted at remote locations only and not be linked to the national grid. Solarisation will not boost exports as energy cost reduction is a global phenomena and lower then Pakistan solar energy production cost.
IT Sector and Tax
Taxes on IT and cell phones and computers is an impediment in digital connectivity which discourages research and is a clog on technology’s growth. Surprisingly the telecom and tobacco sector is declaring losses since several years and is a withholding agent of tax only. Telecom sector is not even listed on the stock exchange.On the taxation side out of 42 income tax withholding provisions 35 were transitory and to be phased out which has not happened as it is a convenient tool to collect taxes. The withholding tax regime is mostly adjustable but few file returns of income to the authorities. The withholding of tax on cell phones subscribers implies that there are around 110 million taxpayers in Pakistan with most being actually below taxable limits . The performance of the authorities responsible for attracting foreign direct investment into Pakistan has been pathetic . Good quality research is a low priority and universities are at the bottom of international ratings.
As mega dams have not been constructed since decades water storage and electricity generation is less then before and electricity generation from imported fossil fuels is exorbitantly high. Steel was obtained from ships scrapped at the coast of Balochistan. Now the Convention of Recycling of Ships has come into force and as a result few ships would come to Pakistan to be scrapped.
Agriculture and Climate Change
Sugarcane cultivation is water intensive and is being done at the cost of cotton cultivation. Sugar consumption is not healthy however the sugar cartels dominate. Phosphatic fertiliser has become expensive hence only nitrogenous fertiliser is being used by farmers which is lowering the yield per acre. Canals are desilted on paper only. Protective bunds and check dams in Balochistan are repaired on paper only hence rivers overflow and at times it is improper to attribute rain water flooding to climate change. Excessive and illegal coastal reclamation is destroying deltas and estuaries and rainwater is trapped and is not drained into the sea as salt water intrusion is taking place.The arable area is decreasing due to mushrooming and unplanned growth of housing societies whether in the agriculture areas or coastal cities which is threatening food security . Food and grain storage and silos are non-existent which cause volatility in food prices and the food supply chain is at the mercy of the toad transport mafia . Despite claims of being agriculturally self sufficient cooking and palm oil ,cotton , poultry feed , chemicals and soybean are imported .
Predatory Practices
Predatory real estate practices are common and diaspora are duped into real estate investment. Housing should go vertical and not horizontal . Nutrition standards are abysmally low which lead to stunted growth and physical and health complications for the vast majority and are confused with starvation . The national maritime and aviation flag carrier fleets are shrinking , in a state of shambles and thriving on captive passengers and cargo only and remain uncompetitive.Whereas 50 % or more freight should be transported through rail only 2 % is transported through rail which causes environmental damage and reoccuring road degradation.
Decline in Key Economic Indicators
(negative)(negative)Stock Exchange Reality
The Pakistan stock market was valued at USD $ 99.6 billion highest ever in May , 2017 attributed to a consumption led growth and populist economic gimmickry and Pakistan being favoured or being distributed largesse by the Western countries at that time . The period 2005-2007 witnessed euphoria in developing countries stock markets which are at 1/3 of that figure presently. Subsequent Pak Rupee currency devaluations lowered market capitalisation to $ 30 billion and towards the end of the year 2024 is hovering around USD $ 48 billion. Unfortunately only 40 companies constitute 75 % of its market capitalisation . Factors such as rupee depreciation , other assets classes like real estate also being lesser in dollar terms from earlier 2018 prices is reflective of weak economic fundamentals. In the year 2017 government debt was lower and forex cover in terms of imports was better and dollar parity was in PKR 100-110 range . Despite heavy taxation on real estate the money market has not turned towards the bourse .
Size of the Pie
Simply harping about slashing public sector expenditure and generating revenues is not a panacea for economic ills. The size of the pie has to be increased first. Cost of doing business should be slashed which is possible through executive action rather then resorting to legislation and its accompanying complications. Exclusivity clauses enhance cost of doing business and should be reviewed. Sovereign guarantees are not binding if agreements are poorly negotiated, collusive in nature or compromise the economic sovereignty of the state. The government will have to move into a regulatory mode and greater private sector induction in boards of universities and colleges, public utilities, public sector companies and hospitals be ensured. Grain silos and fossil fuel storage need to be established and increased on a war footing . Public sector companies shareholdings should be divested in a structured and transparent manner and by competitive bidding through the stock exchange. As the business community is a significant stakeholder it should take the initiative in proposing structural economic reforms .
By Nadir Mumtaz
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