Aug 8 - 14, 2011


MUNIR SALEEM: I have served MCB Bank for around 33 years. I began my career as a probationary officer and reached to the level of SEVP. I held the position of Group Head commercial banking till July 2009, joined Kasb Bank in August 2009 as Group Executive Commercial Banking, and am presently working as Acting President since 1st April 2011.


MUNIR SALEEM: Major macroeconomic factors affecting the economic situation presented a mixed picture at the close of the last fiscal year. The balance of payment (BoP) position improved considerably during Financial year 2010-11 (FY11) as a result of exports and remittance growth of over 20 per cent. However, the sustainability of this positive trend remained uncertain in light of the declining cotton prices and increasing dependence on remittances. Furthermore, persistent inflation, weak economic growth, and continued reliance on borrowing from the banking sector remained key challenges for the economy in FY11.

The BoP position showed a positive trend during FY11 with the current account recording a surplus of $542 million compared to a deficit of $3.9 billion in FY10. The external account was supported by robust exports and rising remittances, which restricted currency depreciation to around 0.5 per cent in FY11. The improvement in the external account is also reflected in the forex reserves, which currently stand at $18.2 billion.

Fiscal management also remained a cause for concern with persistent government borrowings from the SBP and banking sector during FY11.

Government sector borrowing from the banking system was Rs702 billion at the end of FY11 (versus Rs522 billion in FY10) and was another major reason for continued pressure on interest rates during the year. SBP decided to reduce the policy rate by 50 basis points to 13.5 percent with effect from 1st August 2011. The key parameter in this assessment is the outlook of inflation that indicates that average inflation in FY12 is expected to remain in line with the announced target. The government has also expressed its commitment to continue with a stance of zero borrowings from SBP in yearly flow terms in FY12, which bodes well for anchoring inflation expectations.


MUNIR SALEEM: Pakistan's strong economic growth during the last 6 years and the projected growth rate is forecast at around three per cent. However, due to lack of proper infrastructure especially roads, national highways, railways, and logistics, including ports and warehousing, industry and trade are adversely impacted. Severe shortage of power and gas is yet to be mitigated. Not only is the cost of doing business increased, the country is also finding it difficult to be globally competitive. We recommend that the government should give high priority to the development of proper infrastructure and immediately form a high level committee from public-private sectors directly reporting to the Prime Minister. Representatives and chairmen of chambers of all major cities should be given 50 per cent participation. From the government, chairmen of relevant major public sector organizations should participate along with secretaries of relevant ministries. This committee should meet with the prime minister on a quarterly basis to prioritize major infrastructure development projects and review their progress. This proposal will greatly speed up the development work for all key infrastructure projects, synchronize the critical development among the provinces and facilitate industry and trade by reduced cost of business as well as significantly enhance global competitiveness which is essential in maintaining the high growth rates projected during next 5-10 years.


MUNIR SALEEM: Pakistan's banking sector reforms, which were initiated in the early 1990s, have transformed the sector into an efficient, sound, and strong banking system. The major changes that have occurred in the banking sector during the last decade or so can be summarized as follows:

- 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks has brought about a culture of professionalism and service orientation in place of bureaucracy and apathy.

- The banks that were losing money due to inefficiencies, waste, and limited product range have become highly profitable business. These profits are, however, used to strengthen the capital base of the banks rather than paying out to the shareholders.

- The banks that were burdened with the non-performing and defaulted loans have cleared up their balance sheets in an open transparent way.

- The quality of new assets has improved as stringent measures are taken to appraise new loans, and assure the underlying securities.

The human resources base of the banks has been substantially upgraded by the adoption of the principles of merit and performance throughout the industry. Recruitment is done through a highly competitive process and promotions and compensation are linked to training, skills, and high performance. The banks now routinely employ MBAs, M.Coms, Chartered Accountants, IT graduates, economists and other highly educated persons rather than clerical and non-clerical workers. The banking sector has become the preferred choice of profession among the young graduates.

- Banking technology that was almost non-existent in Pakistan until a few years ago is revolutionizing the customer services and accesses to on-line banking, internet banking, ATMs, mobile phone banking and other modes of delivery have made it possible to provide convenience to the customers while reducing the transaction costs to the banks. Credit cards, debit cards, smart cards etc. are a thriving and expanding business in Pakistan.

The main lesson learnt from the last decade suggests that financial sector functions effectively and efficiently only if the macroeconomics situation is favorable and stable. The need to maintain macroeconomic stability will thus remain paramount in the years to come.


MUNIR SALEEM: Consumer price index (CPI) inflation for FY11 stood at 13.93 per cent. Food inflation, which constitutes 40 per cent of the CPI, remained the major contributing factor behind rising inflationary pressures during the first half of the year. An average food inflation of over 18 per cent in H1 FY11 was therefore a major reason for the increase in discount rate in addition to fiscal pressures. The 12-month moving average of CPI inflation was 13.9 percent in June 2011, exactly the same level observed in every subsequent month since December 2010, and 4.4 percentage points higher than the target for FY11. This level of inflation is not limited to the prices of few items and is in fact quite broad based, indicating that expectations of inflation are fairly entrenched in the economy. Thus, a meaningful reduction in inflation would require consistent and credible implementation of monetary and fiscal policies.

Acknowledging the persistence of inflation, the government has announced an inflation target of 12 percent for FY12. The government has also provided in the Medium Term Budgetary Framework (MTBF) a desired path of inflation of 9.5 percent and eight percent for the subsequent two years.

Conditional upon factors such as adjustments in the administered prices of electricity and oil and a projected broad money (M2) growth of 15 to 16 percent, SBP's forecast of average inflation ranges between 11 and 12 percent during FY12.


MUNIR SALEEM: We know that Pakistan is already facing serious economic issues like inflation, trade deficits, poverty, and unemployment issues. The domestic and foreign investments are very low because of the law and order situation and engagement in war on terror. In this critical situation, the only solution left for Pakistan government is to go towards the international financial institutes like IMF or the World Bank, because Saudi Arabia has refused to give Pakistan a financial concession on the oil trade, as well as we did not get any support from the forum like "Friends of Democratic Pakistan".

Now government of Pakistan is receiving loan from IMF which imposed extremely tight terms and conditions which already started to show its effects in the economy as the inflation, poverty and unemployment are increasing. A fragile Pakistan economy has been facing both economic and political crisis, which predate the global financial crisis.

The current financial crisis has shown that capital based regulations in ineffective regulations need to be based on leverage instead. Regulation of credit is warranted. The exchange rate regime of pending local currency to the United State dollars has exchanged liquidity problem. Shifting to the policy of pegging local currency to an import weighted basket of currencies would therefore be a wise decision. Government has attempted to control financial crisis with the help of good regulatory system of financial sector.

In this way, impact of financial crisis on banks may be controlled. The government should introduce programs to recapitalize banks, guarantee banks liabilities, and provide liquidity to banks by funding markets and in some case support troubled asset markets.

Responses to international disaster must be systematic, comprehensive, significant and organized.