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Pakistan Economy Watch, What to Watch ?

September 18, 2015

Readers often get confused when they read or see eminent economist/analyst making data blunder that conveys incorrect information about the economy. It is common in Pakistan that our newspapers frequently make such blunders in their headlines stories or editorials and do not even bother to put a corrective or apology note after publishing misleading information.

In last couple of months I came across 5 such major blunders in 3-major English Dailies that either went unnoticed or was never questioned. Last month a leading newspaper flashed faulty headline, which was providing false information to the market. I checked with my source at SBP and got the conformation that the report was erroneous. Everyone opted to kept mum instead of raising their concern on such an important issue.

During the week, I came across numerous newspapers reports on WHT and one eminent economist (Dr.Hafeez Pasha) was quoted that due to imposition of levy, banks deposit fell by Rs 60-70 billion resulting increase in currency in circulation. In his argument he was of opinion that Withholding Tax (WHT) would hurt Banking System and discourage governments Documentation effort.

In most of his write-ups and interviews, he argues that Rupee is overvalued and demands weaker Rupee. He is of view that weakening of Rupee will make Pakistan very competitive in the international market and country’s exports will make big stride.

There is another lobby, very upset about rate cut always found criticizing SBP’s policy stance and since last over 12-months they have been arguing in vain that inflation will creep up.

I would like to provide my input on all issues and would answer point by point.

If we take a look at the Historical Data of Bank Deposits of last few years, on most occasions it has taken dip after half yearly closing, as banks generally collect money to show fat June end Balance Sheet. Hence, deposit growth during this period is mostly inflated.

To support my argument, here is end of June/August data shown year wise in Rupees in Trillion (Source SBP). Percentage in minus or plus indicates that since 2007, how many times Bank Deposit have Decreased, which is shown in Bracket or Increased showing plus sign. Since 2007 it has only increased once.

2007 June Rs 3.460 Trillion Vs August Rs 3.403 (1.65)
2008 June Rs 3.832 Trillion Vs August Rs 3.788 (1.15)
2009 June Rs 4.120 Trillion Vs August Rs 4.115 (0.12)
2010 June Rs 4.661 Trillion Vs August Rs 4.606 (1.20)
2011 June Rs 5.599 Trillion Vs August Rs 5.364 (4.20)
2012 June Rs 6.402 Trillion Vs August Rs 6.276 (1.97)
2013 June Rs 7.316 Trillion Vs August Rs 7.174 (1.94)
2014 June Rs 8.082 Trillion Vs August Rs 8.132  + 0.61
2015 June Rs 9.141 Trillion Vs August Rs 9.020 (1.32)

Further, please note that as per SBP website Currency in Circulation saw reduction from Rs 2.8 Trillion (July ) to Rs 2.7 Trillion present (Aug 28). Therefore it has not increased currency in circulation has decreased by more than Rs 100 Billion.

As we are approaching Eid ul Azha, past trend suggest cash withdrawal amount during this period surges by roughly around Rs 100 billion that always pushes Currency in Circulation higher at same pace.

If we assess list of tax payers, large part of the business community and rich class of the society are not willing to pay taxes on their direct income causing severe Revenue shortfall resulting Tax to GDP ratio to plunge below 10 pct.

In a span of 69 years, Pakistan had to approach IMF over a dozen times to arrange foreign exchange funding to manage its foreign borrowings or for deficit financing purpose. Pakistan still has no other choice and IMF is unavoidable due to lack of focus/vision on growth. Hence, 0.6 pct withholding tax is a move in right direction that should help in determining tax evaders. Yes, double taxation should be avoided.

What makes Bears think that Pak Rupee is overvalued and depreciation would do wonders?  Let’s do some soul searching.

Our economist/exporters/experts/analyst always compare Pak Rupee with Indian Rupee and Bangladesh Taka. Soon after Bangladesh independence in 1971, One US Dollar parity was set at 7.86 B Taka, Indian Rupee 7.46 and Pak Rupee was 4.76. In 1981 PKR was 9.9, INR 8.65 and BDT 18.31. In 1991 PKR was 23.80, INR was 22.74 and BDT 36.75. In 2001, PKR were 61.92, INR 47.19 and BDT 53.84. In 2005 PKR was 59.50, INR 44.10 and BDT 60. In 2009, PKR was 81.20, INR 44.40 and BDT 67.40. In 2012, PKR was 93.40, INR 53.44 and BDT 81.64. And as of September 16, One USD would fetch PKR 104.37, INR 66.40 and 78.13.

Now, do the calculation and compare for yourselves. You will find that  Pak Rupee is the worst performing currency. History suggests that our exporters always enjoyed the best of facilities in shape of easy loans, avail refinancing facility, enjoy subsidy and yet failed to deliver. Our exports in last 6 years have been extremely disappointing and are a major cause of economic mess.

While in return, due to sharp depreciation of Rupee, it caused severe inflation, eroding value of Rupee.

And lastly, it’s a weak argument that rate cut risks inflation and would add pressure on Rupee. SBP can comfortably defend Rupee, with a total Commercial Bank NOSTRO limit of nearly USD 450 Million. It can easily corner speculators and hoarders/exporters holding foreign exchange by supplying excess funding.

With Rupee target rate at 6 pct and FED Fund target rate between Zero to 0.25 pct, interest rate differential suggest that Rupee is still too attractive for investors.

To sum up this discussion, the shiny side of the economy is temporary and will be short-lived due to window dressing. Over all impact can be well assessed from Pakistan’s total debt that has reached Rs 19.915 Trillion. If revenue target is not met, annual deficit financing may easily surpass Rs 1.5 Trillion. Due to liquidity crunch, SBP’s Open Market Operation (OMO) could get close to Rs 1.5 Trillion by the end of 3rd quarter of 2015. Next year (2016) PIB maturity amount is around Rs 1.5 Trillion.

Therefore, to watch economic trend, just keep an eye on Debt figures, Rs 19.914 Trillion) Revenue Collection (FY 2015-16 Target Rs 3.1 Trillion), Total amount of Investment by Banks in Government Paper-PIB’s (Rs 3.233 Trillion), T/Bills Rs 2.533 Trillion = Total PIB+T/Bills = Rs 5.567 Trillion, Export/Import (Estimated Target $ 27 + $ 43), SBP OMO (Estimated to surpass Rs 1.6 Trillion FY 15-16), Circular Debt ( Current Rs 633 Billion) and Remittances (Estimated $ 19 Billion). Impact of rest of the data will be negligible.

Therefore, to arrest economic collapse it is imperative to reduce funding cost by slashing Target rate by another 100-200 basis point and immediately slash coupon rate by another 300-400 or else link bank investments in government securities with Credit expansion/Corporate Lending to stimulate economy and to create new job opportunities that will also help in increase much needed tax collection.

The nation has to stop day dreaming and trumpeting about false economic growth, as the damage has reached point of no return. SBP is doing all the fixing by using its available Monetary tools and now it is for the Fiscal authorities to play their role.

EURO Bond Issuance suggests Pakistan Economy at Risk.

Watch Kamran Khan talking to Asad Rizvi


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