The central bank wishes to follow an easy money policy— as the economy is still not picking up pace. But, is it going to lure investment while many other essential ingredients are missing?

Its a billion dollar question because inspite of the easing of the monetary policy over the last two years, major investment in industry and other sectors is still not forthcoming. The growth stays slow. Consumers are unhappy. The government still has nothing much to show.

The State Bank of Pakistan (SBP) has assured that interest rate will be kept stable, and bank credit will be available easily, during fiscal 2003—a policy it initiated nearly two years ago. Inspite of this, still there is hardly any new, major investment on the horizon. Such a situation cannot last long because coming into office of a “political” government headed by Prime Minister Mir Zafararullh Jamali, means that a newly elected Parliament, and a rather noisy opposition will have a lot to question. In order to stay in business the strong Opposition will vent the popular demands for relief in several areas, including the back-breaking high prices of state-owned utilities, growing poverty and unemployment problems, to list only a few . The industry and business, too, are saddled with high-price utilities that have raised the cost of production, eroded their profit margins, and added to their headaches to export.

The central bank has been trying to create an environment for the economy to look up. In its first Monetary Policy Statement (MPS), just unveiled, SBP says that it will support the monetary expansion to be “more than 16 per cent,” against the current-year target of 10.8 per cent “precipitated by rising foreign exchange inflows.”

“Money supply in the remaining six months of the current 2003 fiscal will be aimed at managing the classical, impossible trinity of a stable exchange rate, stable interest rates and unrestricted foreign exchange inflows.” “Price and exchange rate stability, in the wake of anticipated foreign exchange inflows, will translate themselves into increased supply of reserve money. Thus containment of reserve money growth to its target level will remain the policy goal.”

A question: How will the SBP’s monetary policy turn the economy around? That is of interest not only to the financial sector, but also to business and industry at large in a situation where investment stayed stunted. Even earlier measures easing the monetary policy have failed to impact it over the last two years. Even now, the central banks plans to do its bit through a “gradual and steady appreciation of the rupee, accelerated repayments and pre-payments of external debts and liabilities, especially the most expensive ones, and holding interest rates unchanged.”

But, what are the ground realities? Isn’t it a fact that even such good measures have shown their limitations in the present environment, marred by the ground realities that are outside the operational scope of the SBP? These include the investors, business and industry’s frustration with the new, two- month old government, as it has been unable to spell out what it wishes to do with the economy. Lack of vision, inertia, or simply its low-priority of economy, may have been the reason. But, such a limbo-like situation does not turn the wheels of industry.

Since he came to power, Jamali and his ministers have been obliquely mentioning in their speeches that the policies pursued by President Gen. Pervez Musharraf over the last three years will continue. But that precisely may be the reason for keeping the economy in a freeze. At the same time, the government or President Musharraf can point out that there is neither a change in policies, nor in the key economic managers, as a confirmation of the continuity. Finance Minister Shaukat Aziz, and the SBP Governor, Dr Ishrat hussain, both continue to enjoy the support of President Musharraf, the IMF, the World Bank, other international financial institutions (IFIs), and in more populist terms, Washington itself. So, Jamali may say: this is “the” policy. This is “my policy.”

However, Mr Jamali and his government will still have to do a good deal of work in very many dark-to-grey areas. Some of these include:

The continued bad law and order situation, that is in fact, deteriorating.

The feuding tribal chiefs making nation’s economic arteries a hostage for their money grabbing efforts. The natural gas pipelines continues to be hostage to their demands.

Can Mr Jamali, in view of this, ensure the safety of international gas pipelines running from Turkmenistan to Pakistan via Afghanistan, and Iran to India, also via Pakistan? What image does it create of a FDI-starved country among the potential international investors? The “negative” Pakistani image among managers of foreign direct investment has been repeatedly pointed out by investors at numerous fora at home and abroad. What can all the abilities and experience of Hafeez Sheikh, PM’s new adviser on investment and privatization, and Waseem Haqqi of Board of Investment, do about improving it?

The high cost of doing business in Pakistan.

The high utility, and other input costs. The increasing non-availability of competent, and highly skilled manpower ranging from the IT, advanced electronics, and robotics.

Still very high cost of finance, in spite of the SBP’s genuine efforts to bring the lending rates down and the success of the big blue chip corporates, currently getting away with bargains with banks that are laden with immense liquidity.

Above all, the very state of the industry, and related infrastructure. Can the existing Pakistani industry, mostly established forty years ago, that uses 1960s, pre-IT, pr- computer, and pre-robotics technology, at all be upgraded?

Their obsolete technology not only means high cost of production, poor quality of products, lack of variety, and failure to cater to needs of the 21st century consumers who are more advanced and have better tastes than the owners of those industries realise, put a question mark on their very existence. Their financial and banking problems and mercurial government policies apart, aren’t these some of the real factors that have shuttered down more than 4,000 industrial units?

Of course, these questions are outside the purview and operational scope of the SBP. But these are the stark questions for which the new government has either no time, no answers, or no stomach—or all three. Inspite of this, the SPB monetary policy is forward looking and contains most ingredients that can move the economy forward. Tight money policy pursued in fiscal 2000 and 2001 in order to check prices and improve exchange rate to build up forex reserves, has been eased. Inflation rate has stayed around 4 per cent a year. Is it because of stagflation?

The central bank has reduced the discount rate from 14 to 12 per cent between June and August, 2001, and following 9/11, it was eased to 7.5 per cent by December 2002. The objective is to help the business and industry, by creating a non-inflationary environment for investment. It was also meant to push commercial banks to slash their lending rates, which they did to some extent. The SBP estimates the average lending rate in December was 13.12 per cent.

But, the business still considers these rates to be high. As a result, they generally are resorting to self-financing, utilization of forex and home remittances inflow, term certificates, and leasing. But, bank credit has also picked up to some extent as the SBP says.

The overall financial scene seem to be dominated by the rising amount of home remittance sent by overseas Pakistanis. In the first half of 2003 these were $2.147 billion compared to $982.32 million in the like period of fiscal 2002. Remittances are projected at $3.35 billion by June this year. The forex reserves— $3.38 billion on 9/11— are projected to rise almost three-fold to $10 billion by June 30.

The SBP projects the monetary expansion to be more than 16 per cent at Rs281.5 billion till the end of fiscal 2003 against the target of 10.8 per cent or Rs190 billion

Expansion during July-December, 2002 was 9.4 per cent or Rs166.4 billion. “Strong external sector performance will be the key factor in sustaining the ongoing monetary expansion,” it says. The current account recorded a surplus of $1,229 million in July-November, 2002, up from a mere $157 million in the like five months of 2001, inspite of a 17.1 per cent increase in imports. The capital account also improved as there was a net outflow of only $6 million in July-November, 2002, compared to $670 million in July-November 2001.

The central bank is of the opinion: “with industrial growth momentum sustaining, agricultural crops looking promising, export expansion remaining steady, and private sector credit picking up, the prospects of achieving the targeted growth of 4.5 per cent appear quite high.” “Consumer confidence also seems holding up and there are no signs of a sharp consumer retrenchment. “Foreign investment is beginning to trickle in, but domestic investor sentiment still appears cool,” the SBP, very under-statedly, acknowledges.

The cavitate to the SBP forecast :”the current monetary stance is unlikely to be altered unless there is a material shift in the inflation outlook or exogenous shocks such as Iraq war hits the economy or some other unanticipated events disrupt the trajectory.” It also assumes that the interest rate environment in Pakistan’s major trading partners and major competitor nations will remain unchanged. “The risks in the absence of Iraq war, are balanced and there are no accentuating trends, which are likely to affect the current stable interest rate environment.”