INTERVIEW WITH IMRAN SAEED, HEAD OF FINANCING SIEMENS PAKISTAN & MIDDLE EAST
June 18 - 24, 2012
Imran Saeed secured first position in B.Com and passed MBA in finance. He has been heading the treasury and trade finance department in Siemens Pakistan for last 16 years. Responsibility includes hedging of company exposure, arranging financing, cash management, corporate finance and structured trade solutions. Being a head of trade finance in Middle East, he is also responsible for overall trade related activities of Siemens companies operating in more than 10 countries.
PAGE: HOW CAN CONCEPT OF INFLATION BE EXPLAINED TO A COMMON PERSON?
SAEED: Inflation refers to a general rise in prices against a standard point of purchasing power. Previously, increase in money supply was called inflation, which is termed now 'expansionary monetary policy' or 'monetary inflation'. Inflation in the present times is measured technically through comparing two sets of commodities with increase in cost at two points during a specific period. Although there are various methods to measure inflation but two out of them are most correct and trustworthy: first CPI (consumer price index), which indicates the rise in the prices of goods and second GDP (gross domestic product) deflator, which measures inflation in the economy as a whole. Inflation comes into being due to intersection of money supply, output, and rate of interest.
PAGE: YOUR VIEWS ON HISTORY OF HIGH INFLATION IN PAKISTAN.
SAEED: Highest rate of inflation, between 2003 - 2012, was recorded at 25 per cent in August 2003 while it was at 10 per cent in July 2003. In other words, average rate of inflation during this period was recorded 10. Rate of inflation in April 2012 was 11per cent.
PAGE: WHAT HAS BEEN THE INTEREST RATE TREND?
SAEED: Interest is the price of loan capital. The history of rate of interest in Pakistan reveals that it was highest (20 per cent) in October 1996 during the period 1992-2012 while it was lowest in November 2002 (seven per cent). In other words, average rate of interest during the past 10 years was 12.8 per cent. Rate of interest was 12.5 per cent in 2012.
PAGE: HOW WOULD YOU LINK INFLATION WITH INTEREST RATE?
SAEED: Borrowing is indispensable for every business or production activity. Loans are needed for constructing factory building, purchasing of machinery, equipments, raw materials, paying wages, meeting of overheads etc. All these expenses constitute cost of production. In other words, if the rate of interest on borrowing is enhanced, production cost is bound to increase. No business or production activity is adopted as fun but profit is the basic motive. If the cost of production increases due to enhancement in the rate of interest, increase in price of product is a must. In other words, rate of interest and price level move together in the same direction. Rate of interest and inflation, therefore, are indirectly related.
PAGE: IN ITS MONETARY POLICY, STATE BANK OF PAKISTAN (SBP) DECLARED GOVERNMENT BORROWING THE MAIN HURDLE IN CONTROLLING HYPERINFLATION, KEEPING RATE OF INTEREST AT 12 PER CENT. WHY?
SAEED: It has clearly been mentioned in the monetary policy that the government of Pakistan has been borrowing recklessly due to which funds fell short with SBP to lend to the private sector. It is proved with the fact that the volume of government loans has reached to the extent of Rs1660 billion acquired from the banking system. Obviously, if this trend of public borrowing is not stopped or curtailed, it would not be possible to culminate the dream of arresting the inflationary rate at 10 per cent into reality.
PAGE: WHY HAS THE BANKING SYSTEM FAILED TO EXTEND NEEDFUL LOANS TO THE PRIVATE SECTOR?
SAEED: Banks are fully aware of the fact that borrowing has become indispensable for the government because the private sector, due to exemplary downfall in production activities, is not capable now to provide revenue to the government according to its needs. On the other hand, the government expenditure is increasing persistently due to rise in salaries and allowances of ministers, extraordinary expenses on foreign tours by the government officials, and expansion in cabinets both federal and provincial. Energy crisis has added fuel to the fire. When the factories will have no electricity, what will they produce? Therefore, borrowing would be the expensive business for them. When the banks can earn 12 per cent profit without any efforts and risks, why will they lend to the private sector.
PAGE: ACCORDING TO WHAT STRATEGY, THE SBP HAS CONTINUED TO KEEP RATE OF INTEREST AT 12 PER CENT?
SAEED: If rate of interest is reduced, it would affect people's willingness to save and if it is increased from 12 per cent, enhanced cost of production would accelerate inflation further through fall in production. This is the reason that rate of interest has been kept unchanged.
PAGE: WHY ARE ECONOMIC REFORMS NECESSARY FOR IMPROVEMENT IN THE PERFORMANCE OF THE ECONOMY?
SAEED: As the financial authorities are increasing short-term internal loans rapidly, monetary policy of the SBP cannot play effective role in these circumstances. Fall in the rate of inflation has totally been negated in the monetary policy. It is, therefore, necessary that basic economic reforms must be implemented for the positive change in the economy. Keeping inflationary rate around one digit will not only be difficult but impossible without curtailing public borrowing from the banking system and specially from the SBP.
PAGE: WHAT OTHER TYPE OF REFORMS, APART FROM FINANCIAL REFORMS, ARE REQUIRED FOR CURTAILING THE RATE OF INFLATION?
SAEED: The ratio of private investment and GDP has gone down to the extent of 12.5 per cent during fiscal year 2012, which emphasizes the need of financial reforms. Environment is not congenial for business and production as energy crisis and worst law and order situation have polluted it. Consequent to this, demand for credit in private sector has enormously been decreased. Prompt reforms, therefore, are required in energy sector for rebuilding the confidence of business sector.
PAGE: DO YOU THINK THAT THE TENDENCY OF GOVERNMENT BORROWING IS THE VIOLATION OF SBP (AMENDMENT) ACT 2012?
SAEED: Yes, in accordance with the monetary policy, the pace of government borrowing from the banking system has been extremely very fast. A net increase of Rs1,098 billion took place in the public loans from the banking system between the period July to May 2012. Pace of borrowing from the SBP caught speed from April 1 to June 4, 2012 adding Rs310 billion. Consequently, the total volume of loans payable touched the figures Rs1660 billion. Due to this open violation of SBP (Amendment) Act 2012, not only the terminal loans are necessary to keep at zero but these loans will have to be repaid during the next seven years.
PAGE: IN THE LIGHT OF PRESENT INFLATIONARY SITUATION, WHAT CAN BE PREDICTED IN FUTURE?
SAEED: In accordance with the SBP, there is no wonder that the dearness has increased on the basis of CPI by 12.3 per cent. A worth mentioning aspect of tendency of dearness is its stay at a high point coupled with weak economic activity. Nevertheless, a hope has been expressed in the report of SBP that inflationary rate is not expected to rise fast during financial year 2012-13. It is expected that the rate of inflation would remain around the present level. According to the SBP, negative gap of income and expenditure of the financial authority is the main problem, which can't be bridged up without financial reforms.
PAGE: IT HAS BEEN SAID IN THE MONETARY POLICY THAT PAKISTAN WOULD NEED EXCESSIVE INFLUX OF FOREIGN MONEY. WHY?
SAEED: Repayment of loans, during 2013, is expected to increase. So, excessive influx of foreign money would be needed to keep the foreign exchange reserves intact.
PAGE: HOW DOES THE ECONOMY OF PAKISTAN GETS IMPACT OF INFLATION?
SAEED: The immediate and important effect of inflation is the reduction in purchasing power or the value of rupee. Inflation affects retired people hard with fixed income as their purchasing power decreases month to month. Those whose income is not fixed are comparatively in a better position because they can combat inflation by increasing their income. Another destabilizing effect of inflation is that the people, for cultivating advantage of increasing prices, increase their speculating activities. Since some purchases are called 'high risk investment', expenditure diverts from normal channel creating 'structural unemployment'.
Inflation changes the pattern of income distribution. If inflation period is long, creditors face higher loss than the debtors do. In other words, loan acquired in the past is repaid in deflated rupee. Inflation weakens the 'value storing' function of money because every unit of money, with the passage of time, becomes value less. During inflationary period, progressive loss in value of money encourages the people to use it for the purpose of deferred payments.