23 February 2004	Monday	02 Muharram 1425

As money is the life-blood of any economy, the first priority of policy makers has been financial "reforms", specially in the face of looming debt crises in late 1990s.

Now, the situation is radically altered. There is money far in excess of emerging markets and governmental demands including over $12 billion foreign exchange reserves.

Yet, flashlight is still on financial markets as economic managers want to build upon what, they perceive, has been achieved by de-regulation and globalization of the domestic financial market in the past four years or more. And hence the Eurobond flotation and the central bank's decision to allow banks to set up brokerage houses for share and securities.

The focus is not on using excess money on productive investment, employment and reducing poverty. What is more important for the policy makers is to borrow more foreign money to cement bonds with the international financial market.

They continue to ignore the consequences of putting the financial sector first at the cost of other more vital economic sectors instead of striking right balances.

The recent example is that of the United States, where according to the former chairman of the Economic Advisory Group under Clinton Administration, Joseph Stiglitz, "financial markets first" policy has contributed to the 2001 American recession. In his book "The Roaring 1990s", he says, "the so-called wizards of the financial market were remarkably myopic.'

Pakistan is following the American prescription that what is good for Goldman Sach and Wall Street is good for America and good for the rest of the world.

In a recent interview to the Fortune magazine, even the guru of all management gurus Peter Drucker has cautioned that" there is a jittery body of excess money that is desperately in need of returns, and it could become panic-prone" and warns that 'we have no economic theory or model for this." He was referring to "an enormous amount of surplus capital in the world for which there is no productive investment.'

Last week, subscription for $500 million Eurobonds floated by Pakistan in the international market exceeded $2bn partly due to enormous amount of excess money in the international market and partly due to the very attractive interest rate of 6.75 per cent that it offered.

The US Fed rate is one percent and its discount rate is two per cent at which banks borrow. Corporates get short-term loans at 3.50 per cent and countries with greater sovereign risks borrow at about 4.5 per cent, says a banker.

Whether on second thoughts or persuaded by foreign banks as market gossips go, a tardy government has decided to compete with knowledgeable international banks equipped with global network to reap benefits of a floating rate in a volatile market on a five-year bond.

This too, when speculations are rife about possible interest rate hike. It is felt that US foreign borrowing of two billion dollars per day can only be sustained by raising interest rates, if not earlier, after the general elections in November this year. The US Fed chairman has signalled for "patience" with sustained economic recovery seen round the corner.

But it cannot be denied that even expensive commercial debts are better than relatively cheaper borrowings from multinational lenders when compared to the high cost the country has to pay for the conditionalities attached to their credits specially in terms of heavy social costs.

In another market-related move, the State Bank has allowed local and foreign banks to operate as brokers for share and security business. Earlier, prudential regulations effective from January 1, 2004 permitted banks and development financial institutions (DFIs) to keep 20 per cent of their equity in shares if they raise deposits from general public or through certificates of investments (COIs). The banks and DFIs which do not raise deposits/ COIs money are eligible to holding upto 35 per cent of their equity.

The curbs came in the wake of reports that quite a few banks/DFIs were making more money from stock markets than from core bank business of lending. Banks were given licences in the UK to open brokerage houses as far back as late 1980s and the European Union has recently decided to allow banks to operate as stock exchanges.

It would appear that the financial market is being deepened to help banks and financial institutions share growing business risks among an increasing number of players. The reforms are primarily designed for the benefit of the financial community and its role in the real economy has been put on the back burner.

Instead of project financing, the banks buy corporate bonds to fund the financial needs of companies. These bonds can be traded between banks and other financial players, sharing risks with a package comprising good and bad portfolios. The concept of development financial institutions is dead, say officials.

The policy is to have fewer but stronger banks and to move towards universal banking. With a range of financial services like leasing, investment, project funding, brokerage service, commercial lending under one umbrella (either through divisions or separate subsidiaries), the PICIC has emerged as a model for universal banking. The sources of its growth have been many and diversified which have also provided it the strength to absorb risks and losses, if any.

The banking risks are also shared by the private pension funds, now planned, and other players in the financial markets. Globally, the financial sector reforms are so designed that supply of money exceeds the market demand.

The money is available for speculations for the benefit of active and knowledgeable players. And derivatives serve as financial weapons of mass destruction, say critics.

The enormous amount of excess supply money not going into productive investment indicates that the process of turning money into capital is flawed. In Pakistan, mergers of financial institutions are encouraged by tax incentives.

But the same is not available for manufacturing companies. In the United States, the incomes from speculation are taxed lightly as compared to manufacturing.

Many have described currency markets as casinos where over 90 per cent of the transactions are of speculative nature.Currency has been turned into commodity.

The deep influence of the Wall Street on the US policies in the 1990s has been counter-productive for the largest and most developed market economy in the world.

The unparralled influence that the United States gained over the world economy after the collapse of the Soviet Union was substantially lost because its policies forced through economic diplomacy or the IMF eroded confidence in globalization. This is the handiwork of Wall Street.

'The dominance of the US is already over" remarked Peter Drucker when asked "does the US still set the tone for the world economy'. Our economic managers are trying to ape a model which may have helped a developed and saturated market for a while before turning counter-productive. Will it help Pakistan?