Daily Times

We are on the verge of disaster, we cannot bear exchange rate instability and so we cannot modulate interest rates, thus we have been stuck in a trap while some individuals have benefited at the country’s loss

Its often advised to not change horses in midstream. While the Finance Minister was concluding talks with the IMF, news came about that he was removed. The government denied, and right before the IMF deal was to be finalized and the budget was to be presented before the legislature, the Finance Minister announced his resignation. The government was not done with a change of horses, and then changed the jokey as well, when Raza Baqir was appointed the Governor of the State Bank of Pakistan. The jockey was of course from the other camp, a long time employee of the IMF, with which the government was to itself strike a deal. The Governor then appointed a Deputy Governor, Murtaza Syed, once again someone who used to sit on the side of the IMF. If the change of the horse and the jockey was not enough, the government then changed the midstream. Once again few weeks before the federal budget last year the Federal Finance Secretary was removed as he had been unhappy over the negotiations with the IMF.

Who would dare question the deal with the IMF, or argue with it for Pakistan’s interest when both the top political rank and the top beurocratic rank were fired for being unhappy with the IMF’s programme or arguing with it too strongly?

Yet even dangerous is the position of conflict of interests that the Governor and the Deputy Governor of the State Bank of Pakistan find themselves in. Brought in to not only negotiate the IMF programme but also to implement it, both have been long term senior employees of the IMF in the past, but are expected to be given even better positions with the IMF once they complete their current assignments. It has always been a cardinal legal principle that the honesty or dishonesty is never in question, all that the law looks at is whether there is room for conflict of interest, and there is plenty of room here, in fact it seems like a banquet.

This increase in reserves was therefore neither through export expansion nor a blooming tourism industry, both PTI electoral promises, but easy money through attracting short term investment by foreigners

The IMF programme that Pakistan is hell bent on implementing has caused the government to adopt anti-Pakistan policies which has led to a wave of inflation that has increased poverty and has pushed people to the verge of mental breakdowns and Pakistan’s public debt has reached record levels while the government of Imran Khan has been busy playing to the galleries by selling buffaloes, travelling through commercial airlines and serving tea without biscuits at official meetings. Among a plethora of economic policies that are not pro people, one can be criticized as being the most malicious, the menace of high interest rates which has led to the slowest economic growth in the region, with India, Bangladesh and Nepal all outgrowing us.

It would not be a futile question to ask, who the government is trying to benefit with such high interest rates? The banks in particular must be quite happy. There is a huge gap between the borrowing and the lending rate, all to the benefit of banking institutions, who have hit a jackpot with the current interest rates. The lending rates are as high as 18%, at the cost of the general public, which is now unable to lease houses or cars or even invest in businesses triggering economy activity. Rather the deposit rates have been kept at a level where the spread between the lending and borrowing rates is benefitting few banking moguls over the general public.

Yet there is a more sinister consequence of such a high interest rate. Pakistan has been thrust into a debt trap by the current government, which refuses to change its non-serious, ad-hoc and populist attitude in the face of real and grave challenges faced by Pakistan. The government can of course try to defend itself by stating some numbers, the increase in official foreign exchange reserves.

But these numbers are dangerous for one too many reasons. The increase in official reserves is either only illusionary, e.g. Saudi money which cannot be spent by Pakistan or at the cost of an increase in public debt. A good $3 billion have been invested through 3-month T-bills, which the government set at 13% interest rate. These must be some of the luckiest investors in the world, especially when investors can easily borrow money at 2% to 5% all over the world, and therefore these investors have earned millions of dollars at Pakistan’s expense only through borrowing and investing. It is a great moral obligation on the government to tell the Pakistani people who were these people who were given an unbelievable 13% return on investment?

This increase in reserves was therefore neither through export expansion nor a blooming tourism industry, both PTI electoral promises, but easy money through attracting short term investment by foreigners. The world has experimented with this before and learnt. The 1997 East Asian Financial crisis, which led to the fall of a strongman like Suharto, was a result of high interest rates without proper control on the currency outflows. The inflows and outflows, derogatively referred to as “hot money” can be transferred out of Pakistan overnight. Mahatir’s Malaysia has taken strategic and structural initiatives to stop such history from repeating, but while Khan looks upto Mahatir as an ideal leader, he and his government has failed to show the same level of fiscal responsibility.

Whenever Pakistan decides to lower interest rates to rational levels, foreign investors who have no patriotic feelings towards Pakistan will fly their money out. A disaster is on our verge, we cannot bear exchange rate instability and so we cannot modulate interest rates, thus we have been stuck in a trap while some individuals have benefitted at the country’s loss. As yet there is no clear and specific legislation or executive measures to solve the current predicament.

The writer is a barrister, who has an interest in Pakistani current affairs, economy, constitutional developments, foreign policy and international law