Please refer to the news item titled “Shortage of goods, plant closures: IMF identifies import curbs as the real culprits” carried by the newspaper in its yesterday’s issue.
I do not agree with the Fund’s assertion. The main mistake, whether deliberate or unintentional, is that the IMF has never imposed an important benchmark on raising the tax to GDP ratio. Instead, it continued to place more emphasis on raising the amount of revenue income collected in Rupees, which has always been augmented by PkR’s depreciation that has only fuelled inflation rather than creating space for economic progress.
Esther Perez Ruiz, the IMF representative, has clearly demonstrated a lack of economic understanding. The government policies of (past & present) are not the only real reasons behind import suppression in Pakistan that have resulted in shortages of goods, plant closures, decreased economic activity, or a decrease in revenue collection.
The present decision is made due to unfavourable circumstances. It is because of the severe liquidity crunch (local currency/foreign exchange) brought on by the restrictions imposed due to austerity measures sought by the IMF. Ministry of finance and State Bank of Pakistan are compelled to encourage banks to invest in government bonds/T-bills/Sukuk instead of lending to private sector.
Sadly, this is the reason why banks’ deposit-to-advance ratio has plummeted to 50%. While, their investment in government securities is around 80%, whereas it should be the other way round. The average global bank lending to deposit ratio is about 80%. The ultimate result is an economic disaster that causes pain in the manufacturing and industrial sectors as a result of incorrect feedback to the IMF office in Washington.
Because of liquidity crisis, Pakistan’s economy has also been unable to upgrade the agricultural sector for more than ten years. It resulted in extremely high unemployment, which in turn has caused a sharp decline in tax revenue that your news report has pointed out. My estimate is that the economic pain sustained at this time may have cost Pakistani rupees 15 to 18 trillion.
My main concern is how and why the IMF permitted the banks to invest in such a significant amount of government paper. As is customary around the world, banks typically lend between 85% and 90% of their deposits to the corporate sector. While the remaining balance is in the form of reserves to prevent bank runs, sizeable money is still available in the central banks’ reserves to pay the depositors in the event that significant sums of money are withdrawn.
Higher interest rates caused US government paper prices to spike sharply, which led to the current global financial crisis. Our policy rate is 21%, and I am not excluding another increase. Did we learn anything from this?
Despite the fact that we lack the concept of insurance, we can argue that significant amount of depositor’s funds are secure because they are parked with SBP. My concern, though, is that the IMF’s current government exposure policy is never contested.
Despite the fact that the securities are guaranteed by the government, what if rating agencies in the future take note of the exposure to government bonds and T-bills and Sukuk and ask banks to cut their holdings? Do we have a backup plan then? Due to the financing of our deficit, we are already somewhat restricted and becoming confined. Do we have any other solutions to resolve the issues except restructuring? What plans has the IMF given that they have been so silent while we have been forced to keep raising the policy rate, which is currently unmanageable?
Asad Rizvi
Karachi
Copyright Business Recorder, 2023
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