Nov 10 - 16, 2008

In the aftermath of the recent and the most sever financial crisis the central banks around the world are trying their best to avert the emerging recession. Efforts are being made to come up with bailout plans and bring down interest rates in the developed world. However, the International Monetary Fund is asking developing countries to increase interest rates and Pakistan also faces a similar situation.

It is becoming evident that if Pakistan opts for the IMF assistance it will have to increase the discount rate by 3.5%. In most recent development, Treasury Bills auction, yield on 3-Month bills breached the psychological barrier and policy rate level of 13%, indicating a likely policy rate hike on the cards.

Pakistan faces mounting current account deficit and erosion of foreign exchange reserves. Although the policy planners should have come up with their own 'disaster recovery plan' they are opting for the easiest. Having got free from the shakes of IMF after decades, Pakistan is likely to once again embrace an IMF program, where it would be asked to raise the policy rate. The same has been witnessed in countries opting for the IMF assistance. These countries include Iceland and Hungary. Both countries have raised policy rate by 600 and 300 basis points respectively.

The question now is how much the policy rate would be raised? Reportedly the IMF has asked 350bp increase while market expectation is approximately 150-200bp. Analysts expect a 150bp one-off rate hike anytime, on the back of receding inflationary expectation and slower than expected money supply growth.

In the latest auction, SBP raised 3-Month T-Bill cut-off yield by 97bp to 13.53%, vis--vis policy rate of 13.0%. SBP accepted bids worth Rs 53 billion and rejected all bids for 6 and 12 month paper. Some analysts do not expect KIBOR to move sharply upwards as this is already priced in, while others believe that lending rates would be increased by another 3 to 4 per cent once the agreement between Pakistan and the IMF is signed and money starts flowing in.

The figures being quoted about the assistance being sought after are mind boggling and one fails to understand what has gone wrong with Pakistan and why does it need such huge money to avoid default. In fact the problem was identified much earlier but the habit of sweeping the problems under the carpet has pushed the country to the present level. Interestingly, the policy planners are not ready to take any decision at their own or come up with any plan and banking upon the IMF assistance without understanding its harsh impact.

In the recent past the key decision makers at the central bank have been stubborn and constantly increasing policy rates. Ironically, these wiz kids also did not pay any heed to whatever the business community and the economists were saying. Their myopic view was that inflation could be controlled by raising interest rates. The time has proved them wrong because inflation was not contained but entrepreneurs decided to defer their fresh investment due to huge 'front loading'. At the same time quantum of non-performing loans also started bulging but 'who cares' attitude prevailed.

In Pakistan higher inflation was the outcome of 'cost pushed' phenomenon. Most of Pakistan's imports are inelastic and hike in crude oil and commodities prices not only kept inflation rate high but also eroded Pakistan's liquid foreign exchange reserves.

Analysts also termed the overflowing money supply the key factor accelerating the inflation rate but policy planners failed in 'taming the shrewd'. Banks policy of paying disappointingly low return on deposits kept tons of money outside the banking system. Bullish equity market yielding huge tax-free capital gains also pushed the prices of equities unrealistically high.

Some of the 'self-proclaimed' financial experts are now suggesting that the IMF is the Messiah and if not approached the country would face imminent default. First, this rationalization is incorrect because of a sustained inflow of remittances, growing exports, declining imports and above all crude oil prices slashed to more than half.

Pakistan can still live without the IMF support provided the policy planners are ready to take some difficult decisions. As such the country faces two serious issues: budget deficit busting limit and trade deficit touching new peaks. Both the issues can be overcome by an old saying 'living within means'. The main cause of rising budget deficit is extravaganza. While no effort is made to contain non-productive expenses developmental allocations are being slashed.

To contain erosion of foreign exchange reserves two immediate steps are required 1) STOP all unnecessary imports and BOOST exports. The first action could be taken by a single stroke of pen by asking 100% L/C margins for luxury goods and putting quantitative restrictions on items without which people can live, because they have lived without these for decades.

However, boosting exports is a little difficult job because it needs multipronged strategy. However, the top item on the agenda should be restoring competitiveness of the local manufacturers. This required reduction in interest rates and utilities cost, bringing down electricity tariff and ensuring its uninterrupted supply.

At the same time new productive facilities have to be created to produce exportable surplus. Paying due attention to agriculture sector can enhance output of major crops, which in turn will reduce import of food cereals and edible oil import. Enhanced production of cotton, by achieving higher yield can restore competitive advantage of Pakistan in textiles and clothing sector.

Preparing sugar industry to play its new role as the supplier of energy could also bring down oil import bills. Boosting sugarcane output can help in achieving three objectives, 1) earning extra foreign exchange from export of sugar, 2) reducing load shedding and power generation cost by running power plants of sugar mills on baggase and 3) producing ethanol (blending alcohol with petrol) for reducing POL import bill.

All these measures are difficult but certainly better than sacrificing sovereignty of the country. Seeking the IMF assistance is the easiest but coming out of its shackles very difficult, the choice is ours.



Samba Financial Group (SFG) of Saudi Arabia plans to take over operations of a foreign bank though the name of the bank has not been declared so far but banking circles were expecting a deal between SAMBA & the Citibank. Knowledgeable sources said that top executives of Samba Bank had a meeting with the Finance Minister Shaukat Tarin in this respect where they discussed the issue recently.

According to Citi Bank's Sep-08 accounts, Citi Bank Pakistan Operations indicated a loss of Rs48million in nine months of 2008 compared to Rs496million net profit during the similar period last year. Rs2.7billion worth bad debts provisioned in 9M08 (vs. Rs1.4billion in 9M07) was the key factor for the loss this year.

Meanwhile Dr. Shamshad Akhtar, Governor SBP, inaugurated the Clifton branch of Samba Bank Limited at Karachi last week. Present at the inauguration ceremony were Sajjad Rizvi, Chairman of the Board; Tawfiq A. Husain, President and CEO; Ajay Makhija, Head of Global Consumer Banking and other senior management of the bank. While interacting with the management, the Governor was also given a tour of the facilities and shown the state-of-art infrastructure of Samba Bank Limited.

Addressing a gathering of Corporate and business leaders and elite of the city at the formal launch ceremony of Samba Bank Limited (SBL), Dr. Shamshad Akhtar, Governor, State Bank of Pakistan said: "The State Bank sees a unique and significant partnership in working together with samba as an important player in Pakistan's relations with the Kingdom of Saudi Arabia, which are very deep rooted, long lasting and futuristic."

The Governor said: "It is not only the vision, technology and good banking practices that Samba brings to Pakistan, but equally importantly, we count on Samba being a catalyst in bringing in bilateral investments"

The Governor referred to her initial meeting in Samba's Head Office in Riyadh and expressed her gratitude towards the Group for their faith in Pakistan's economy and for honoring the commitment to bring in their capital and commence operations in Pakistan. She also expressed her complete trust and satisfaction in the leadership of Samba Bank Limited under Tawfiq Husain.

Commenting on Samba's plans, Sajjad Razvi, Senior Samba executive and chairman of the Board of samba Bank Limited, said "SBL is a majority owned subsidiary of Samba Financial Group which invested US$100 million in the bank in 2007. With a balance sheet size of approximately US$ 50 billion, shareholder's equity of US$ 4.7 billion, and net profitability consistently exceeding US$.5 billion year-on-year, Samba is a leading financial institution in the Middle East. Samba has a rating of A+ by S&P and is ranked 157 amongst the worlds, 1000 largest banks. Samba views Pakistan as a strategically important market for growth and hence made its first acquisition outside the Kingdom of Saudi Arabia in Pakistan. Samba has a long tern view on Pakistan and is fully committed to building its local franchise."

Elaborating on the bank's vision, Tawfiq A. Husain, President and CEO of Samba Bank Limited said, "Our aspiration is to make SBL the most admired bank in Pakistan. SBL's value proposition is supported by a very strong parent and a powerful brand. We are becoming increasingly active in Consumer Banking, Corporate and Investment banking, and Global Markets activities. We will look to expand our footprint by opening new state-of-the -art branches while at the same time promoting Alternative Distribution Channels (ATMs, Samba Phone, Samba Online, etc.). We are facilitating investment flows between the Kingdom of Saudi Arabia and Pakistan, are uniquely placed to meet the financial needs of Non-Resident Pakistanis (NBRPs) and pilgrims going to perform Umrah and Hajj, and will develop innovative products to meet these needs."

Samba has continued to lead the way in offering popular and innovative financial solutions, products and services across all business lines, in keeping with its pledge to deliver best-in-class value propositions. These initiatives are all designed to provide existing customers the benefits of availing superior services in key regional locations. These achievements have been crowned by Samba receiving international, regional, and national recognition from well-respected organizations, trade publications, and rating institutions which have given Samba a number of prestigious accolades for many years including 2006/7 and 2008.