Money out the bank

Author: Syed Bakhtiyar Kazmi

“We expect the SBP to maintain interest rates at current levels of 6.0 percent (policy rate) and 6.5 percent (discount rate) in its January 16 Monetary Policy Statement (MPS). To note, recent surprise in December 15 CPI at 3.19 percent (street consensus: 3.6 percent-3.8 percent) coupled with fresh downtrend in oil prices (down between 17 percent MoM and 19 percent MoM) have given rise to expectations of a rate cut in the upcoming MPS. However, given increasing concerns on potential devaluation in PKR/USD owing to continued pressure on CNY, we expect SBP to adopt a cautious approach and thus keep the policy rate unchanged.”

The above is an extract from the research report of a leading brokerage-cum-financial advisory firm, which is not being named due to a personal conflict of interest and because of self-preservation instincts, which in this case is to limit any exposure, directly or indirectly, from being associated with a research report. However, irrespective of the source of the report, generally this is the kind of analysis found in most reports of this genre; now read the extract again.

Did it make any sense? If it did, congratulations, you belong to the tiniest minority in Pakistan that can understand gibberish. If you did not, do not worry- you are not a nincompoop. The reason complicated jargon like this was invented in the first place was to ensure that the common man remains ignorant of how he is manipulated by the real masters of the universe, a superb moniker for bankers in general and investment bankers in particular. Perhaps another time the reasons why bankers, and not elected politicians or anybody else for that matter, are considered the real masters of every nation on this planet, including Pakistan, can be elaborated upon, albeit with care. Inspite of all the fanfare about a free press, it is rather suicidal in Pakistan to challenge the narrative propagated by the powers that be or to criticise the powerful, directly or indirectly.

Getting back to the extract, the gist of what it says is that although inflation is down, which justifies an interest rate decrease, but because the rupee is depreciating the State Bank of Pakistan will most likely not change interest rates. Hold on to your hats, I will explain in a bit.

Economists insist that interest rates and inflation are linked. The way it is supposed to work is that when interest rates are lowered, more people can borrow money and hence they spend and inflation occurs. Conversely, when interest rates go up, people do not borrow and hence do not spend so inflation comes down. The problem with this theory in Pakistan is, up or down, banks will not lend to 99 percent of the people in Pakistan in any case. As regards the rest of the rich elite and corporations, up or down, if they have a gimmick to make money, they will borrow; interest rates do zilch to augment, or otherwise, their borrowing appetite. Like rates have been down for a while now, and the only one borrowing from the banks is the government of Pakistan. And it is not as if the government was not borrowing before. The IMF put a condition that the government cannot borrow from the SBP, so now the SBP lends to the banks and they lend to the government. So, how exactly are inflation and interest rates linked? And that is after ignoring the undocumented economy, which everybody admits is sizeable and has nothing to do with official interest rates.

Even if inflation is linked to interest rates, just for the sake of argument, we have another problem. The SBP in its own report on the state of the Pakistan economy admits that the prices of more than 90 percent items in the basket maintained to determine the inflation rate (CPI) have either remained stagnant or gone up in the last six years. Because oil prices collapsed, inflation is down on the average and we know how befooling averages are. If one person has zero income and the other gets say 100, the per capita income is 50, but the poor guy is still getting zilch. So, why do we want the prices of the other 90 percent items to keep going up?

And now the whopper! Because of low interest rates, the common Pakistani, and let’s again go with the famous 99 percent label, is getting around or below four percent on his saving deposits in the bank. Obviously, the rich have a lot more money to deposit so they can negotiate rates upto seven percent or even eight percent, and banks obviously will not do anything to annoy their prime customers. The banks can recover this extra cost, perhaps on the interest rates they charge to the 99 percent on their mortgages since the rich do not want to pay a higher interest rate on their loans as well, and the banks oblige since that is good business. On the other hand, for those with money, the better solution would have been to buy dollars and invest them in bonds giving an 8.5 percent return.

Irrespective of all of the above, the question that begs for an answer is: if inflation is around four percent, and that too on the average, and the rate of interest on savings is also four percent, are my savings making any money at all? No, they are not. And do not forget the government has levied a tax on your bank account every time you save more; in substance your saving account is losing money and on top of it you are paying taxes on income that you do not have. So why keep money in the bank?

If the 99 percent figure out that their savings are contracting in the bank, and start hoarding cash, or start buying foreign currency or gold, the already meagre capital available for investment will shrink further. The government, and all other analysts, already point out that the biggest stumbling block hampering economic growth is the low rate of investment in the country. The only way to invest is to save first, an undisputed fact of life. Discouraging people to save is a rather strange way of boosting investment. Frankly, in order to encourage people to save, the rate on deposits should be attractive; at the minimum on deposits under a minimum benchmark to target and inculcate the habit of savings amongst the common Pakistani. This would also, perhaps, be a step towards documenting the economy.

But until that happens, money is better out of the bank. And while I personally hate making predictions, the dollar is going to go up and the mattress business is going to be booming shortly. Or maybe, the common Pakistani will never see the unobvious.

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant

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