Talking business
The word ‘aid’ cannot be mentioned to our creditors without the word ‘reform’ in close proximity.
Federal Board of Revenue (FBR) Chairman Salman Siddique passed through Karachi on Saturday bearing grim tidings. Speaking to members and guests of the Karachi Chamber of Commerce and Industry, he underlined a familiar fact, that the country is facing a ‘financial emergency without declaring one.’
“Nobody is coming to bail us out,” he said, adding that we have to rely on our own resources. The subtext was not lost on the participants.
For over a year now, the government has been awaiting a bailout and postponing revenue decisions in light of a deteriorating political position. But the donors have dug in their heels saying: no reform, no aid.
The resultant gambit has sparked a dangerous game of chicken between the government and creditors. Seeing itself as a vital ally in the war against terrorism, the government appears to have made the bet that the international community will not let the country sink past a certain level.
The donors, for their part, are determined to not repeat the mistakes of the past when cash handouts given to incumbent government were squandered in a binge of elite consumption.
So as the economy heads towards crisis – hyperinflation, depleting reserves, zero growth – both parties, the government and its creditors, are locked in stare-down. But what happens in the meantime, while we wait for the drama to climax?
The government borrows, prints and spends. Printing money has inflationary consequences, but what about the heavy borrowing from the banks through Treasury Bill (T-Bill) auctions? There are two consequences of this.
One is that the government soaks up so much of the liquidity in the banking system that very little is left behind, the classic ‘crowding out’ argument of text books. The other is rising interest rates, as banks ask for a premium to continuously increase their exposure to sovereign risk, a fact that is forcing rating agencies to start aligning banks’ credit ratings with those of the Pakistan government, and it’s the banks that lose out.
All three outcomes – inflation, crowding out and the rising cost of borrowing – can be seen in the numbers. The second half of last year saw the resumption of inflation, abrupt reversal of the cycle of monetary easing that began in mid-2009 and negative growth in manufacturing. Some growth in exports is largely explained by the high cost of cotton and yarn in international markets.
As growth stalls, revenues stagnate and inflation spreads, we have the makings of a perfect economic crisis. The only element missing is falling foreign reserves, partially explained by strong remittances and a narrowing current account deficit – since imports fall due to low growth and consumption at home. But even this could change very rapidly, as proved by the virtual meltdown in November 2008.
The backdrop to the chairman’s blunt message was the meeting between the presidents of Pakistan and the US, following on the heels of a short and intense visit to Islamabad by US Vice President Joe Biden.
In both meetings, the US laid out its priorities clearly: tackle militant safe havens and advance economic reforms. During both meetings, if there was any break in the chilly language in which Pakistan’s economic difficulties are discussed, then the break came from the Pakistani side.
The White House statement after meeting with President Zardari mentioned only “our shared efforts to fight terrorism and promote regional stability.” It was the Pakistani side which added that President Zardari also raised the issue of Pakistan’s “needs and requirements” for its economy, while the ambassador hastened: “Pakistan does not want to be a permanent recipient of aid. We want to be able to stand on our own two feet and for that we need economic reform.”
The word ‘aid’ cannot be mentioned to our creditors without the word ‘reform’ in close proximity. As our undeclared ‘financial emergency’ unfolds, the country remains gripped by an increasingly visceral brand of politics: spiralling target killings and rising tide of extremism. All the while, smiling down upon us is the spectre of a massive economic crisis.
The writer is Editor Business and Economic policy for Express News and Express 24/7
Published in The Express Tribune, January 17th, 2011.
“Nobody is coming to bail us out,” he said, adding that we have to rely on our own resources. The subtext was not lost on the participants.
For over a year now, the government has been awaiting a bailout and postponing revenue decisions in light of a deteriorating political position. But the donors have dug in their heels saying: no reform, no aid.
The resultant gambit has sparked a dangerous game of chicken between the government and creditors. Seeing itself as a vital ally in the war against terrorism, the government appears to have made the bet that the international community will not let the country sink past a certain level.
The donors, for their part, are determined to not repeat the mistakes of the past when cash handouts given to incumbent government were squandered in a binge of elite consumption.
So as the economy heads towards crisis – hyperinflation, depleting reserves, zero growth – both parties, the government and its creditors, are locked in stare-down. But what happens in the meantime, while we wait for the drama to climax?
The government borrows, prints and spends. Printing money has inflationary consequences, but what about the heavy borrowing from the banks through Treasury Bill (T-Bill) auctions? There are two consequences of this.
One is that the government soaks up so much of the liquidity in the banking system that very little is left behind, the classic ‘crowding out’ argument of text books. The other is rising interest rates, as banks ask for a premium to continuously increase their exposure to sovereign risk, a fact that is forcing rating agencies to start aligning banks’ credit ratings with those of the Pakistan government, and it’s the banks that lose out.
All three outcomes – inflation, crowding out and the rising cost of borrowing – can be seen in the numbers. The second half of last year saw the resumption of inflation, abrupt reversal of the cycle of monetary easing that began in mid-2009 and negative growth in manufacturing. Some growth in exports is largely explained by the high cost of cotton and yarn in international markets.
As growth stalls, revenues stagnate and inflation spreads, we have the makings of a perfect economic crisis. The only element missing is falling foreign reserves, partially explained by strong remittances and a narrowing current account deficit – since imports fall due to low growth and consumption at home. But even this could change very rapidly, as proved by the virtual meltdown in November 2008.
The backdrop to the chairman’s blunt message was the meeting between the presidents of Pakistan and the US, following on the heels of a short and intense visit to Islamabad by US Vice President Joe Biden.
In both meetings, the US laid out its priorities clearly: tackle militant safe havens and advance economic reforms. During both meetings, if there was any break in the chilly language in which Pakistan’s economic difficulties are discussed, then the break came from the Pakistani side.
The White House statement after meeting with President Zardari mentioned only “our shared efforts to fight terrorism and promote regional stability.” It was the Pakistani side which added that President Zardari also raised the issue of Pakistan’s “needs and requirements” for its economy, while the ambassador hastened: “Pakistan does not want to be a permanent recipient of aid. We want to be able to stand on our own two feet and for that we need economic reform.”
The word ‘aid’ cannot be mentioned to our creditors without the word ‘reform’ in close proximity. As our undeclared ‘financial emergency’ unfolds, the country remains gripped by an increasingly visceral brand of politics: spiralling target killings and rising tide of extremism. All the while, smiling down upon us is the spectre of a massive economic crisis.
The writer is Editor Business and Economic policy for Express News and Express 24/7
Published in The Express Tribune, January 17th, 2011.