Aug 11 - 17, 2008

Economic progress of a country is directly dependent on savings and investment habits of general public and Pakistan cannot be an exception. However, the country seems to suffer from two contentious issues low savings rate and limited investment opportunities for the smaller savers. This has resulted in slow economic growth and more and more people being pushed below the poverty line. The figure about per capita income becomes completely misleading due to growing gap between rich and poor.

It is on record that Pakistan's savings to GDP ratio was low and recent hike in food and POL prices has made is almost impossible for a large percentage of population to save, rather their debt burden is on the rise. Poor are forced to borrow from the informal lenders as commercial banks do not consider them 'bankable'. Those who have succeeded in obtaining credit cards are rolling over their debt by paying more than 3% per month interest rate, which effectively yield more than 40% internal rate of return for the banks.

While the commercial banks have been raising lending rates, they have been paying very low return on deposits, which is in fact negative return keeping in view Pakistan's inflation rate. Dr. Shamshad Akhtar, Governor, State Bank of Pakistan tried to convince the banks to improve rate of return on deposits but all in vain. Lately, as the last resort the central bank issued instructions making it mandatory for banks to pay minimum 5% return on deposits. Her decision attracted a lot of criticism and banks also tried to create the impression that her decision would impair their earnings.

However, one fails to understand that in Pakistan the average spread is still above 7%, which may not be available in many countries. Despite this banks are not willing to pay a decent return to investors. The high spread has ushered in inefficiencies and extravaganzas. Administrative expenses seem to be eating up a large percentage of the total income. These include handsome salaries and perks, interest free or subsidized loans. Banks also claim to invest heavily in technology in the name of improving quality of services but also charge colossal fees.

In late nineties a number of foreign banks decided to close down their Pakistan operations mainly due to growing competition. Privatization and enhancing of minimum paid-up capital requirement facilitated investors from the Middle East to entered Pakistan with a big bang. European banks also realized the potential of this market and tried to get share of the growing pie. This is one of the reasons that many foreign banks are acquiring local small banks, the latest entrant being Barclays Bank and change in the name of ABN Amro Bank due to takeover of its global operations by Royal Bank of Scotland.

The results of commercial banks have started pouring in and tell encouraging stories. While the core income of all the banks is expected to improve considerably, fee based income also shows not a disappointing story. However, the point of worry is that depositors have once again started accumulating US Dollars.

This indicates two trends 1) banks not paying desired return on rupee deposits and 2) persistent depreciation of rupee provides ample opportunity to make gains as well as earn higher return on foreign currency accounts. This was a common phenomenon in the nineties and the country seems to be moving in the same direction. A point to remember is that the beneficiaries of the foreign currency accounts are elites of the elites.

Rising demand for the US dollar is also eroding foreign exchange deposits as well as exerting pressure on the exchange rate because of the eroding foreign exchange reserves. The latest figures about foreign exchange reserves should be the cause of concern, hardly sufficient for less than 50 days. It may be said that inward remittances could ease the pressure. However, it is feared that if the exchange rate continues to worsen individuals would prefer to keep their money outside the country and monthly remittances may go down.

It is also feared that due to prevailing political uncertainty businessmen may also repatriate their money to destinations like Dubai, where there is a property boom. New projects are also being announced in Pakistan and also attracting investors. Some of the projects announced as joint ventures or having technical collaboration with foreign companies are also attracting the local investors. However, only a limited number of investors could benefit from such projects. The ground reality is that there is an acute shortage of housing units for the middle and low income groups. Growing demand for housing units is not only pushing up the rent but also spreading the menace of Katchi Abadis. The biggest beneficiaries of the Katchi Abadis are the land grabbers.

Even with the organized construction sector people have lost their life savings. Many projects were launched with big fanfare but failed in handing over possession either because work pace was too slow or project ran into litigation due to violation of rules dispute on the title. In the absence of clean tile financial institutions are not willing to extend any financing facility as well as property could not be transferred in the name of ultimate buyer.

One of the major hindrances in the development and growth of the construction industry is very limited availability of housing finance facility. Not only that the limited number of financing institutions does not allow them to cater to the needs of all the borrowers but rate of interest is also high, effectively above 35%, which is just not affordable.

Lately, investment in gold has been on the rise because of the ongoing hike in its price. It is an interesting option and the habits differ within the gender. Ladies prefer to invest in jewellery and men buy 'ten tola bars'. It is true that glitter of gold has always attracted people but the recent preference is mainly due to hike in its prices. However, absence of bullion market in the country does not allow investors to take fullest advantage.

Prices of two commodities i.e. crude oil and gold were on the rise but are facing declining trend. The international gold rate ranges from $880-895 per ounce compared to above $910 per ounce. Few days earlier it was traded around $930. The yellow metal had hit the record level of $973 per ounce on 22nd July.

Local gold price plunged by over Rs 1,500 per 10 grams over the last two weeks owing to a downward trend in the world gold prices caused by falling crude oil prices. The rate of one tola gold bar, after achieving a record high of Rs 26,150 on the constant decline. Jewellers believe that the falling domestic rate has still not pulled buyers of jewellery in larger numbers as price is still beyond their reach.

The Jewellers fraternity strongly feels that rising food prices, coupled with surging petroleum rates and other burgeoning expenses have pushed up cost of living and a majority of buyers have to think many times before purchasing jewellery and other gold ornaments. They also fear further decline in international gold prices. The price may plunge below $820 per ounce in view of falling trend in international crude oil prices.

According to a Jeweller gone are the days when people used to give many sets to their daughters/sisters on their wedding now giving even couple of sets of any significant weight is very difficult. There might be a slight wave of jubilation for the price conscious people who have been waiting for the price fall to place orders or for spot buying, but overall sales have not picked up sharply.

According to different reports gold imports fell by 95% in terms of quantity and 90% in terms of value during 2007-2008 compared to a year ago. A total of 1,052 kg ($24 million) of gold was imported in 2007-2008 as compared to 24,369 kg ($224 million) in 2006-2007.

During the regime of Shaukat Aziz focused effort was made to convince the investors to invest in equities. Under 'Privatization for People' program shares of state owned companies were offered to general public. Public interest was evident from submission of record number of applications for various public offers. However, in the recent past stock market plunged to record low and trading volume also hit record low. Over the months foreign portfolio managers have been liquidating their positions due to inability of new economic managers in providing new impetus to market and declining value of rupee against the dollar.

One may say that most the international markets also face declining trend therefore, bearish sentiments in Pakistan are not exceptional. However, this is incorrect portray of the Pakistan market, which is very different from most of the leading markets and some of the factors affecting those market are not prevalent in Pakistan. They say, "The main cause of declining market in the US and Europe is sub prime loan crisis, which has no relevant for Pakistan at all".

Some of the experts are of the opinion that the institutional investors have not move forward to contain the decline. The creation of market support fund was not only too late but too small. Others are of the view that institutions are also accountable to their shareholders, who certainly do not approve massive buying because the inherent weaknesses still prevail and recovery in the short-term may not be there. Various snap rallies have been recorded but each hike was followed by plunge.

Some of the critics say, "Stock markets in Pakistan are driven by a few giants, who have the power to set the market direction. Institutional investors and mutual funds also behave like 'day traders'. Tax exemption on capital gains and taxing dividend income also encourage investors to indulge in day trading. This point can be verified from the record of Karachi Stock Exchange and National Clearing Company of Pakistan, indicating that tile of less than 10% of daily trade is transferred".

One of the factors encouraging people to pull out their investment from stocks is persistent increase in interest rates. Some of the financial institutions have started offering above 10% per annum on term deposits, which is virtually risk free. This is because financial institutions prefer to invest in Treasury Bills, which is not only risk free but also yields good return.

Some of the critics do not subscribe to this paradigm shift. However, a little probe establishes the fact. Lately, income funds have faced heavy redemption pressure. Most of these are open-end mutual funds and have considerably significant exposure in equities market.

While most of the economic fundamentals for Pakistan remain intact, the economy continues to suffer lack of decision making ability of the coalition government. Most of its time and energy is spent on talks and economic issues needing immediate attention are swept under the carpet.

It is often said that Pakistan's sovereignty is being infringed but no one realizes that deteriorating economic conditions will once again force the government to borrow from international financial institutions at their conditions.