Tag Archive: State Bank of Pakistan

Remember the export of wheat about three years ago by Pakistan triggering a very serious food shortage in the country leading to phenomenal rise in food prices? The same wheat was imported back at exorbitant prices. Since then the price of wheat and flour is constantly on the rise. This was perhaps one of the biggest corruption scandals of the Shaukat Aziz government. It seems that the present government has learnt only one lesson from this regrettable decision; do it again and make billions at the cost of millions of hapless “voters” who you will need only in the next season of “democracy”. Interestingly, this decision, which has been taken to be able to pay off central bank loans, has been taken at a moment when wheat prices are at the lowest in the international market.

It is simply beyond comprehension why export is needed to pay off SBP loans which essentially are in local currency. It seems that the driving factor behind this imprudent decision is dollar-lust. Express Tribune has reported that after a ban stretching more than three years, the government on Tuesday allowed the export of wheat in a bid to pay back central bank debt, a move that could result in a serious food crisis since a World Bank (WB) report has already warned of a five-million-ton drop in production in the next crop. The Economic Coordination Committee (ECC) of the cabinet allowed the grain export without imposing any cap on quantity. It is expected that wheat will be exported in massive quantities since Russia, the world’s largest wheat producer, has banned the grain export resulting in price surge in the international market.

The ECC assessed a $300 per ton (Rs1,040 per 40 kilogram) wheat price in the international market, anticipating a further hike in coming days. Although the government has fixed the wheat price at Rs950 per 40 kg in the domestic market, farmers usually receive an average Rs850. Pakistan is the third largest wheat producer. The ban on export of wheat was slapped in June 2007 when because of incoherent policies the country first exported the commodity and then had to spend over $1 billion to import the same for domestic consumption.

The ministry of food and agriculture’s summary to the ECC proposed lifting the ban primarily to pay back debt taken from the State Bank of Pakistan (SBP) to buy wheat, make room for next year’s crop storage and capitalize on higher prices in the international market. Total wheat stocks are estimated at 9.07 million tons, of which 6.1 million tons are in Punjab. “The Punjab government is paying Rs77.5 million per day interest on loans,” obtained for buying wheat, says the summary. The federal government is picking up Rs24.6 million from the amount.

The production target in the pre-flood scenario was also estimated at 25 million tons. According to the Damage and Need Assessment Report of the World Bank and the Asian Development Bank, “wheat production may reach only 20 million tons opposed to an average production of almost 23 million tons in the last three years.”

The report goes on to say that there is concern about the possible impact of reduced wheat output in the coming season on food security. Around 78,000 tons of wheat were either destroyed or damaged in Punjab during the recent floods.

Pakistan’s President has announced that his government plans to tax the rich to help the poor i.e. flood-hit people. This sincere initiative is a happy development which should be appreciated but will the rich and mighty pay up or will they live up to their reputation of plundering but not paying back. Pakistan’s floods have placed the country at the head of a bumpy road ahead when the country is forced to make tough choices. To start with, Pakistan’s Central Bank has jacked up the interest rate which will have many implications for the flood-hit fragile economy, but the question is: did the new Governor who is an economist of international standing, have any other viable option? Businessweek in its current issue has reported that Pakistan’s deadliest floods ruined crops alone worth 281.6 billion rupees ($3.27 billion), destroying rice, cotton and sugar. And this is one of multiple official versions this time coming from the horse’s mouth, the Agriculture Minister himself. However, the floods have damaged about 10 million tons of crop, which Credit Suisse values at about $1.9 billion.

In this backdrop when Pakistan’s major contributor to the GDP has suffered so badly, the inflation was already out of control and the Bretton Woods sisters had no mercy on the devastated economy and battered populace, this was probably the only thing in his power that a Central Bank governor could do to arrest the inflationary trends. Wall Street Journal has reported that it’s a decision he had to make with incomplete information. Total assessments of the damage to Pakistan’s economy from floods that began in July are still pending….He chose right. The State Bank of Pakistan on Wednesday raised its policy rate by half a percentage point to 13.5%.

The paper says that holding off would have meant a risky delay of action against a worsening inflation problem. Consumer prices in Pakistan have been rising too fast for three years, with gains close to a 12% rate throughout 2010. The floods will amplify the problem, but floods aren’t the only source of a price shock in Pakistan. Islamabad is under pressure from the International Monetary Fund to increase electricity tariffs and raise general sales taxes and import duties—all of which would add fuel to the inflation problem. Not taking these steps could have the country miss out on a $3.2 billion IMF payment due by the end of this year. Pull it all together and economists at Standard Chartered expect inflation to average 15% in the fiscal year that began in July.

Then there’s the fragile state of Pakistan’s economy. Flood damage means Pakistan’s critical agriculture sector will contract 1.7% this fiscal year, the sector’s first decline in a decade, Credit Suisse predicted. It means economic growth could slow to 2.5%, much slower than last year’s 4.1%, and a crawl by Pakistan’s standards. Add to this the infrastructure damage—from power plants to highways—and industrial growth, too, will suffer. The International Labor Organization estimates 5.3 million people will lose their jobs because of the flood. Raising rates, and promising to keep doing so, in such an environment is certainly not going to win Mr. Kardar any friends in the business community. But inflation is the more frightening of Pakistan’s economic challenges. Price stability is far more critical to Pakistan’s long-term growth. Foreign aid and remittances from overseas Pakistanis will ensure money flows into the economy.

We are making all-out efforts to shut-down the industry and businesses in Pakistan. Apart from the fact that industries and businesses are hardly making any contributions and their slowing down is not felt by the common man in terms of sharp decline in the quantum of tax revenues, there are certain industries which are in export business earning foreign exchange and the businesses and industries offer employment opportunities. Their slowing down or closure will result in unemployment, though it will save energy for air-conditioning etc. State Bank of Pakistan has decided to increase the interest rate in the wake of persistent inflation in spite of the official target to bring it down to 9%. This inflation, and a persistent inflation at that, indicates that money is overflowing in the economy and has exceeded the amount of goods leading to a situation where goods are virtually sold through auction and rates are dictated by the suppliers.

The traditional approach to arrest the inflationary trends is to take the money out of the market and divert it to other uses. These other uses could be many but the quickest way to divert the money from the economy is towards investment. For this purpose, the Central Bank offers attractive returns on the moneys invested. One of the best ways of offering attractive returns is to control the interest rate and fix it a higher rate so that those with excess liquidity can find alternative use of their money to make more money.

This approach has some pitfalls like it increases the cost of doing business. With increase in the rate of interest, the financial cost also shoots northward making businesses totally unviable. Naturally, if a business has been started keeping in view existing hurdle rate and suddenly, the business finds the hurdle rate shooting up; the entire feasibility of the business crumbles. This has a chain effect in the economy. Given the fact that businesses are already falling apart due to non-availability of the basic input like gas and electricity and there becoming dearer by the day, this decision of increase in the interest rate will deal a severe blow to the already collapsing economy.

Business Recorder has reported that the business community has rejected the increase in interest rate, pronouncing it as anti-industry and anti-economy move by State Bank of Pakistan. Business community Saturday showed deep concerns over the increase in interest rate and termed it an irrational decision, especially for the industrial sector, already facing enormous problems. They feared that country would witness another spell of economic slow-down due to the decision.

They said the industry is already under extreme pressure due to consistent power shortage, prevailing law and order situation, high bank charges and interest rates where foreign investors are hesitating to invest. Nothing was going in the favor of business community; industrialists were repeatedly demanding to bring down the interest rate to single digit so that the ailing industry is able to recover from depression, however, the adverse decision would only give severe damage to the economy, cost of doing business would go up as a result of recent increase in power tariff and now increase in interest rates.

The industrialists and businessmen are of the unanimous view that instead of boosting, the decision to increase interest rate will slow down the economy.