RUPEE VALUE AND FOREX RESERVES
INTERVIEW: SIRAJUDDIN AZIZ, PRESIDENT BANK ALFALAH
Sep 6 - 12, 2010
In the high interest rate environment, currency always remains under pressure and unless the inflation rate is contained and brought on the lower side the currency cannot move into the appreciation mode.
It is interplay between exchange rate and the interest rate. When interest rate is high, currencies depreciate and when it is low currencies appreciate in the forward market. This is the rule in global market, which cannot be changed.
Sirajuddin Aziz, President Bank AlFalah while speaking on the complex issue of prevalent high interest rates in Pakistan said that if he identifies himself with the State Bank of Pakistan to look at the interest rate regime in the economy from the perspective of the central bank then the stiff monetary stance is to be appreciated.
He said that there are a few major reasons for keeping the interest rate on the higher side and one of the factors is the heavy borrowing of the government from the banking sector to meet its expenditures.
Explaining his point of view, he elaborated the income resource of the government to meet its expenditures whether on account of public services or to meet administrative cost, the first and foremost is levying taxes on all income generated in different segments of the economy.
The Bank Alfalah Chief was firm on his optimism that if human resource development program is launched with a strong passion to develop youngsters through training and education responding to the market needs then these skilled and qualified youngsters have the potential to change the fate of the nation. The only thing is to provide them proper direction and knowledge.
He specifically mentioned the impressive amount of home remittances of around $9 billion sent by overseas Pakistanis in financial year 2010 and expressed the home that these young trained and skilled workers can become a great and reliable source of foreign exchange for the country. They need proper grooming and guidance in the right direction only.
Unfortunately, the tax to GDP ratio in Pakistan is on the lowest side when compared in the region. For example, tax to GDP ratio in India is 18-20 per cent, while tax collection even in Bangladesh is also around 14 per cent of the GDP and in Pakistan according to the government figures it is somewhere around 10 per cent; latest number indicates that it less than 10 per cent. We have made promises with the three international donor agencies especially IMF under which the economy is programmed to take this ratio from 10 to 15 per cent during next three four years. But there seems no hope to achieve that target especially after the flood devastations especially in the agriculture sector; over 20 per cent of under cultivation area has been swept away by the floodwaters in Pakistan.
Under the given circumstances, the government is left with no option but to borrow from the banking channels to carry on its social development program as well as other public sector development plans which naturally lead to expenditures. This situation adds to inflationary pressures as the government borrows on high interest rates.
Sirajuddin Aziz who knows the art of conversation explained the complex issues of high interest rate, depressed exchange rate and mounting inflationary pressures in such a manner that even a lay man could understand that where does the problem lie.
Aziz besides having a reputation of a banker of high caliber is equally known in the world of art and literature due to his poetic and literary work and of course of his propriety of manners and consideration for others in the society which makes him a unique personality.
Dilating upon the issue of high interest rate and high inflation rate, Aziz explained that the government has become a major borrower which gives a secure lending option to the banking sector. For example, as a banker if I have two options to lend money to a common person or to the government, I obviously would prefer the former because it ensures safe returns on the loans, he said. This situation has a side effect on the economy as the government being the largest borrower crowds out the private sector from the credit market.
Mounting inflationary pressure in the economy is another gray area of Pakistan's economy. He recalled that food inflation had gone up to 25 per cent some ten months back though food inflation was contained to 18-20 per cent through tightening of the monetary policy and the real inflation was measured at 12-13 per cent by the government but again it was prior to the flash flood.
To contain inflation central banks have tools. One of them is either to enhance the interest rate or increase cash reservations by pulling liquidity from the market as well as to contain money supply. After a long time, the central bank in its last review of the policy rate had decided to increase policy rate by 50 bps with the only objective to contain the inflationary trends.
Actually everything in the economy is not indicating a bleak picture and there are certainly some positive signs as well, he said with a smile and cited the example of impressive contribution of the overseas Pakistanis in the form of home remittances. He said during the last fiscal 2010 Pakistani workers remitted over $8.9 billion which is an encouraging sign. It is however difficult to evaluate whether they are sending because they are earning more or they are remitting from their savings in the face of tighter banking regulations in overseas markets. He, however, was of the opinion that the overseas Pakistanis have the capacity to remit even more which can be enhanced to the tune of $12 billion in near future. This source of cash flow is extremely important for Pakistan to meet growing imports.
The debt servicing is another area of concern for Pakistan's economic health in view of ballooning external and internal debts besides the depreciating Pakistani rupee which is adding to the pressures of the borrowed money. What we borrowed at Rs60 to a dollar is now with the depreciation of rupee translated into Rs85-86 to a dollar adding seriously to the financial liabilities of the country. Hence, the interest cost of the deficit financing has become a major element of the federal budget as a major chunk of the cake is used on deficit financing which leaves a little for the government to run the government, for social care of the people like health and education or construction of roads and other development projects. Since these social developments cannot be neglected the government has no option but to go for bank borrowings, Aziz gave a logical explanation of the strained financial situation of the government that can be described as a vicious cycle.
While explaining why exchange rate is in a depressed state, Bank Al-Falah Chief cited the example of Bangladesh 'which has even less foreign exchange reserves compared to Pakistan yet its exchange rate is stronger than Pakistan. The reason for that is simple whatever Bangladesh has as its reserves is the hard earned money while a major chunk of Pakistan's foreign exchange reserves is borrowed from the donor agencies. The saving impact is quite natural on Bangladesh's economy."
He recalled the policy of consumerism in the market initiated by Shaukat Aziz with a view to improve purchasing power of the people that would generate product and services in the economy. Somehow that policy clicked for sometime. The intent was to develop periphery and vendor industry and that was the time when the governments should have tightened their belts to overcome the shocks and sharp swings of the high tide as well. Unfortunately, when the high tide struck the economy Shaukat Aziz had given up and political problems had started to raise their heads. As a result of that model, the interest rates were at the lowest side from 6-7 per cent and that opened the floodgate of consumerism especially in the automobile sector and housing sector which also ignited a spark in the allied industries. However, unfortunately that cycle of consumerism could not be maintained and the rising interesting rate caused heavy strain on the borrowers. That was a good model but the capacity to deliver did not remain intact due to political instability which had a severe fallouts on the economy, Aziz remarked.
In fact it was amazing to see the revival of the stock market even after eight months of suspended business as it does not happen elsewhere in the world. If any Far East stock market is closed for eight months it would require at least eight years to revive, he highlighted a serious issue in a lighter tone and concluded with an optimistic remark that the economy in Pakistan is full of resilience and could regain its past glory given the right direction to the policies.