AN EXCLUSIVE INTERVIEW WITH AB SHAHID
KHALIL AHMED, SENIOR CORRESPONDENT
Oct 11 - 17, 2010
Mr. AB Shahid is a Pakistani economist of international repute. He did B.Sc from the University of Karachi and MBA from IBA, Karachi. He is also a fellow of the Institute of Bankers, Pakistan (IBP). He joined Esso Eastern Inc Pakistan in 1970, and left it in 1977 ñ a year after it became Pakistan State Oil Co. For the following 33 years, he served different financial institutions in Pakistan, UK, Oman, UAE, and Hong Kong, and retired from active professional life in February 2009. During this 33-year period, he visited 29 countries. Both formally and informally, he also offered advisory services to the State Bank of Pakistan, National Accountability Bureau, National Institute of Banking & Finance, and IBP. He has authored three books viz. Management of Leasing Operations, Bank Lending ñ the new challenges, and Finance of International Trade, which were published by the IBP. He also writes articles on economic issues for Dawn, Business Recorder, and the Financial Post.
PAGE: IS FOOD INFLATION THE PROBLEM OF PAKISTAN OR OF THE ENTIRE WORLD?
AB SHAHID: According to almost all text books on macroeconomics, a sustained low level of inflation is necessary to incentivise continued investment in economic activities. Compared to underdeveloped and developing countries, in developed economies the food basket forms a smaller portion of the components of the Consumer Price Index (CPI). Secondly, because these markets are better regulated, largely due to fair competition and absence of overly powerful suppliers and cartels, food inflation remains at realistic levels. But this is not the case with the underdeveloped and developing economies dominated by powerful suppliers and cartels. The combined effect of weak market regulation and shady role of trade associations is that market monitoring remains weak and market ethics are virtually absent due to lack of accountability. Pakistan unfortunately falls in this category. That's why food inflation remains practically uncontrollable. What makes things worse is that, for political reasons, the real impact of inflation is not reflected in the CPI index because the Federal Bureau of Statistic (FBS) remains a state-controlled outfit. The biased warning signals (CPI) and absence of stiff regulatory arrangements have allowed members of the food supply chain to charge prices according to their wishes, not the unbiased logic offered by supply and demand interaction.
PAGE: HOW SHOULD FOOD INFLATION BE TACKLED?
AB SHAHID: As explained earlier, food inflation in Pakistan is a bigger problem compared to other developing countries because of lack of market regulation, continued check on market behaviour but, above all, lack of market ethics that should have been inculcated by the trade associations. All these gaps need to be filled, and the state and the trade associations must accept their obligations therein, which they don't.
To begin with, until the state develops the capacity for independently and realistically working out food prices based on demand and supply, it cannot go around fixing prices and keep mum over their being disregarded by the market players, which is what we see on a daily basis. Secondly, given the gross shortage of law enforcers, the state's ability to enforce market discipline will remain weak. This issue needs urgent remedial action.
The state must require the trade associations to draft strict codes of conduct for their members and enforce them strictly by blackballing every member who violates them. Corrupt traders must go out of business to set examples for the rest. Unfortunately, for the present, trade associations' sole focus is obtaining tax relief, nothing else. But, if the state doesn't push these associations to fulfil their real role, why should they?
In India, we observe stricter market disciplines and punishments for not observing them. The reason there for is that both the state and trade associations take their obligations seriously, and the media highlights market players' misconduct. In Pakistan, although the media is fairly powerful, it is not as focused on effectively checking market malpractices as it ought to be.
PAGE: WHAT CHANGES HAVE YOU NOTICED IN AGRICULTURE SECTOR OF PAKISTAN OVER THE PERIOD OF LAST 25 YEARS?
AB SHAHID: So far, the changes have been negative. The present government provided this sector a great advantage by guaranteeing international market prices for the crops. Given the miniscule contribution of this sector to tax revenue, this was unfair because the costs this sector incurs are not as high as they are internationally. As a matter of fact, besides being much lower, they are subsidised.
This sector has yet to respond to this favour by striving to eliminate crop deficits i.e. cultivation of crops that have traditionally been imported, and serve as an import substitution sector. But, we also must not overlook the impediments created by the recent floods. What the people now wait for is a responsible response by this sector to the benefits it enjoys at the cost of the taxpayers.
There is enormous potential in the fruit sector. It is time players invest in fruit processing and packaging, and substantially increase Pakistan's exports. It is also time the agriculturists realise that, in the foreseeable future courtesy the continued depreciation of the Rupee, Pakistan will depend on the agriculture sector for economic growth, not the industrial sector.
PAGE: HOW DAMAGING IS INFLATION FOR ECONOMIC GROWTH?
AB SHAHID: As I explained earlier, sustained low inflation is a driver of growth because it allows safe planning for the future. But, if inflation rise is too rapid and unpredictable, businesses can't plan and invest with confidence because cost escalation can't be estimated safely. Secondly, this state of inflation is seen only by corrupt as the ideal money making environment, not the true investors who believe in market ethics and want to earn fair returns to allow consumer purchasing power to grow, not dwindle.
But, the reality is just the opposite as is visible from the slide in the rate of real investment. In fact, even purely speculative investment in the stock and debt paper market by both Pakistani and foreign investors is also sliding. The fact that, for the past two years, we did not witness the floatation of new companies or corporate bonds indicates virtually no fresh investment in the real sector.
The fact that Pakistan has a high population growth rate enjoins on the economy continued expansion of its industrial and agricultural productive base to employ and feed larger numbers. Two years, and it seems this trend may continue, is too long a period for a country like Pakistan to see a virtual stop to real investment. This is a very disturbing indicator for the future.
PAGE: HOW WOULD YOU COMMENT ON THE RECENT MONETARY POLICY OF SBP AND HOW GOOD OR BAD IS IT FOR SMES, WHICH CONTRIBUTE MORE THAN 30 PER CENT TO THE COUNTRY'S GDP?
AB SHAHID: The recent rise in SBP's discount rate was a negative development but had less to do with SBP's own assessment of the economy but more with the commitments Pakistan's government has already made to the IMF. SBP had already admitted that increasing the discount rate had failed to check inflation. Sadly, this realisation was not reflected in the last monetary policy statement.
In an economy, whose bulk remains undocumented and borrows from informal money lenders, discount rate hikes can't check inflation; such regulatory measures hurt only the documented sector that borrows from financial institutions. As explained earlier, inflation cannot be checked without implementing the measures I highlighted.
Pakistan's documented SMEs suffer from discount rate hikes much more because they tend to be over-leveraged and their financial costs form a disproportionately large part of their total costs. Analysts are of the view that the combined effect of depreciation of the Rupee, inflation, slowdown in demand, increase in power tariff, imposition of the Reformed General Sales Tax, and now another discount rate hike could force more loan defaults, but worse still, SME closures and higher unemployment.
None of these are desirable outcomes. This environment needs to be reversed through well thought-out remedial strategies that (1) cut imports only to the essentials, (2) triggers a purpose-oriented dialogue with the business community to enforce price controls that cut inflation, (3) implements a result-oriented action plan to check power theft rather than resort to its load shedding and hiking of its tariff and, (4) reduces public sector debt via austerity and higher tax revenue collection.