The new monetary policy

THE monetary policy for the fiscal year 2007-2008 has been announced by Governor of the State Bank of Pakistan Dr Shamshad Akhtar. It maintains the recent policy of monetary restraint and moderation, seeks to lower the inflation rate to 6.5 per cent and sustain the growth rate of 7.2 per cent.

Whether it will succeed in either or both objectives depends on several other factors including the response of industrialists and businessmen, or simply the traders and the consumers who have done little more than protest against high prices. If they want to achieve a lower level of inflation, they have to play a more pro-active role and reduce consumption of over-priced goods and stop patronising high priced services.

As this is being written, the prices of twenty kitchen items have risen sharply. This is a daily occurrence though the number of items being affected varies.

A key element in the monetary policy is raising the discount rate, the rate at which the State Bank lends its money for three days to commercial banks, by half a per cent to a full 10 per cent, which may raise the banks’ lending rate to 13 per cent from around 11 per cent. The State Bank has followed this time the US central bank which has been raising its interest rate by a quarter per cent quite many times. But unlike that, the State Bank has raised the discount rate by half a per cent and made the total around 10 per cent, enabling banks to raise their rates up to 13 per cent and that is a large area of gains for them and loss to business class.

The monetary expansion in fiscal 2007-2008 will be 13.7 per cent. But not all the bank credit provided maybe used by borrowers. In the last fiscal year, the borrowing was short of the target by Rs9.9 billion.

At the same time, the governor has asked the federal government to return Rs62.3 billion which it had borrowed from the State Bank to reduce the inflationary impact. When the federal government borrows from the State Bank, the money comes through the process of printing extra currency which, when it goes in to the market, aggravates inflation. Hence Dr Akhtar wants the government to borrow through the PIBs. The finance minister has agreed to return the money but not all of it. In making this demand, Dr Akhtar has been both consistent and bold. In 2006-07 the government’s bank borrowing was only 10 billion rupees but last year the amount jumped to 62.3 billion rupees which was excessive.

While enabling the banks to increase the credit by 13.7 per cent, the State Bank has also made the banks increase their capital reserve to three billion rupees. Out of 32 banks, 19 have raised their capital and the others are either trying to merge or go out of business by selling themselves to larger banks.

Similarly the State Bank has done away with the need for banks to have a cash reserve of seven per cent so as to encourage savings. That means the banks will have more money to lend.

The State Bank says one of the factors responsible for a price rise is the recent increase in salaries. But while the salaries of government employees, federal and provincial, have been raised by 15 per cent, those of the judges of the superior courts have gone up by 25 per cent but its contribution to inflation will be small.

Now can the monetary policy lower the inflation rate to 6.5 per cent from seven and particularly the food inflation rate of 10.3 per cent which hits hard the poor and the low income groups? In India the inflation rate has come down to 4.36 per cent from 4.41 per cent. A year ago, it was 4.72 per cent.

The Reserve Bank of India has also acted by making the REPO rate 7.75 per cent and making the cash reserve for banks 50 per cent which reduces the capacity of banks to lend. Businessmen and industrialists who have to pay higher interest rates pass on that to the consumers and make larger profits as well. But the consumer has no such option. He either cuts down what his family eats or has to try to take on a second job if he can get one.

In China, when the interest rate for lending was raised recently, the interest rate for saving was also pushed up correspondingly. It is so because China does not want its savers to be the losers. Not so in Pakistan. We are averse to dictating the interest rates the banks can provide to savers. The ratio of the weighted average of the interest for savers here is one to four of what is provided to the lenders. Hence, the banks gain four times on the income of savers and are making huge profits and offer fabulous bonuses to their chiefs. Justice has to be done to the savers if we are to save more and invest more instead of depending too much on foreign loans with its political overtones. The problem can be solved if the State Bank would fix the interest rate for saving instead of regarding that as interference in free enterprise.

If inflation has to be reduced and exports increased, there has to be more of savings and investments and that can be done only by promoting the savings and rewarding the savers. Now when we are talking of public private partnership, the State Bank should not hesitate to fix reasonable saving rates. It is not necessary that a fair rate of savings should be only for large saving deposits and for long periods. This is a country in which banks ask the students to open bank account with one rupee deposit. Now you need a lakh of rupees to be treated well by well established banks.

If the banks would not listen to reason and persuasion of the State Bank and the interest of millions of savers suffer, the State Bank should not hesitate in fixing or suggesting savings rates.

Now the exporters have the fear that since 30 per cent of the export refinance has to come out of the resources of the bank, the banks may not be promptly doing that or charge the concessional rates for the export refinance. Their concern is genuine and the governor has assured them to review the situation after two or three months in the light of the performance of the new monetary policy.

The monetary policy can have limited success in an environment in which money is afloat from too many sources, particularly in the large informal economy. The foreign investment apart even home remittances of 2.5 billion dollars came from the Gulf region last year. How much of that was real remittance and how much recycled funds is not known. In such an environment a tight monetary policy has limited success particularly in a high profit economy. Still the State Bank has to do the best it can.

The first real milestone

THE Supreme Court’s unprecedented ruling last month that threw out the government’s case against the Chief Justice is the first real milestone in 60 years in the country’s journey towards integration and democracy. The judgment will become a bulwark against unconstitutional actions by the rulers and future interventions by the military.

If the judiciary proves worthy of its new-found image and independence, Pakistan’s rulers will no longer be able to violate the Constitution in pursuit of their personal and party agendas, even less organise a physical assault on the Supreme Court.

Any future military adventurer will have to be a latter-day Halaku Khan to commandeer power through the force of arms, for his path is not likely to be smoothed by the ‘doctrine of necessity’. He will confront a judiciary with a new look, heroic lawyers backed by the masses and a defiant civil society that will not make it easy for any adventurer to get away with misrule.

A Baloch judge, wronged by a Mohajir ruler, defended by Punjabi lawyers, supported across the board by Balochs, Mohajirs, Sindhis, Punjabis, Pashtuns and exonerated by a Supreme Court made up of judges from different provinces and headed by a Hindu acting chief justice — there has not been a more soul-satisfying moment in the annals of Pakistan’s history.

For the first time since 1947, Pakistanis would have made Jinnah proud.

A nation’s strength rests on justice. If nations are justly governed it gives them inner strength that no amount of armament can match. A nation is as strong as its people are free, productive and creative. Besides their freedom, it is also the productivity and creativity of the people that an unjust society stifles.

The people of Pakistan have never experienced just rule. They have been mere bystanders as their country faltered and lurched from crisis to crisis, led by despotic rulers. The feudals/tribals, the bureaucracy and the military that have held the country by the throat since its birth, have given priority to maintaining the status quo at the cost of justice. The denial of justice is a potent tool for subjugating the people.

The judicial crisis has ended and justice has triumphed. The lawyers’ role in the triumph has been admirable. They acted purposefully and in a resolute manner against the dominance and manipulation of the judiciary by the executive. For both the lawyers and the judges, a new image will prove a refreshing experience.

The people have given up on political parties to lead the country out of the quagmire. That is why they are in the boondocks and the people’s hopes now rest with the judiciary. This is a unique phenomenon where the legal fraternity, not a political leader or party, is seen as beacon of hope for the country. Hopefully, the bond between the people and the judiciary will become a new force for the cause of justice and rule of law.

Civil society and the legal fraternity have come together as a new force against the regressive and exploitative forces which have so far held sway. If President Musharraf does not mess about with the judiciary as a free organ of state again, he will find that he will stand taller than he did before the judgment.

However, the work of the lawyers-people combine is not yet over. The forces that seek to keep the country moored in the mediaeval milieu of jagirdari and zamindari or seek to drag it back to the seventh century must be challenged. No ruler or government, except President Musharraf who has faced up to the extremists, has dared to challenge the two varieties of degenerate backsliders who are determined not to let the country keep pace with global changes and progress.

The feudals are a legacy of the Mughal and colonial eras. The religious extremists are a homegrown malignancy that Jinnah had warned of in no uncertain terms. Both retrogrades are deeply entrenched in the polity — the feudals also in the social order — of the country.

While the feudals, after earlier land reforms and some loss of influence following the 1988 elections, are a wounded breed, they still have enough clout to continue to obstruct democracy and exercise an unhealthy control on the lives and future of the people who live in their area of influence.

The army has also behaved like an unfeeling feudal in the case of the farmers in Okara, who were arbitrarily dispossessed of land they had tilled for years, and which the army claimed belonged to it. As in the case of the tenant-farmers arbitrarily ejected by feudals, the Okara farmers ejected by the army had no legal recourse and nowhere to turn to for justice.

The army-run farms are both an argument for and against corporate farming. Corporate farming is a subject which needs an in-depth study, something which the lawyers and civil society can sponsor. There is lot that can be done to improve the life and conditions of tenant-farmers which the feudal-dominated political parties will not do.

An NGO can be set up jointly by the legal community and civil society to research and study issues pertaining to feudalism and tenant-farmers. While such an NGO will not have political standing, it will have overwhelming public support and funding to become a powerful pressure group. Such an NGO could be the first nail in the feudals’ coffin.

The extremists can be found in several nooks and corners of the country. Where they are not present, their proxies take over in the cabinet and the army.

It is clear that the lawyer community and civil society can be a force on the streets. However, as far as possible, street confrontation with the religious extremists must be avoided. Street power is their only and ultimate strength. The extremists must be hit where they are weakest and most vulnerable — intellectual power.

In a massive, professionally conceived and produced campaign in the audio and visual media the strengths of genuine and learned ulema and internationally and locally recognised scholars of Islam can be used against the extremists to debate topics relating to Islam to present two versions of the religion — one as espoused by genuine scholars and the other by clerics of the Lal Masjid genre.

The latter type, after a few rounds of debate and discussions in public view, will resort to their stock response when cornered or shown to be wrong — that those who do not agree with them are heretics. The people would know better.

Sun continues to shine

BIT by bit, the tensions on the Korean peninsula are easing. On Wednesday, it was announced that the leaders of north and south would meet for a two day summit, the first in seven years, later this month.

In July, the communist regime shut down its sole nuclear reactor and promised to make a full disclosure of its nuclear programme. The next grand gesture could be a summit to declare the end of the Korean war, which, technically, continues to this day: only an armistice was signed when hostilities ended in 1953.

The last time the leaders of north and south met, in 2000, the then-president of South Korea Kim Dae-jung was simultaneously showered in international glory and drenched in domestic ignominy. Kim got a Nobel peace prize for his sunshine policy, but struggled to justify the hundreds of millions of dollars he passed to the north to pave the way for the summit. This time round, president Roh Moo-hyun has promised transparency and full disclosure, even so far as making cabinet discussions public.

The conservative opposition nevertheless cried foul on Wednesday, accusing him of politicking months before a presidential election in December. South Korean officials said that the meeting could be the last chance for the north to deal with a pliant president from Seoul, as Mr Roh's turbulent term of office comes to an end, and a future conservative president could be tougher. In truth, differences between the centre left and conservative parties on North Korea are hard to discern. Few votes are to be gained in the south by being tough on the north.

The scene is set for a series of momentous declarations when the two leaders meet in Pyongyang. Both are in the habit of springing political surprises, and the results of the summit will be carefully assessed by other parties in the nuclear talks. North Korea has been skilful at exploiting the differences between America, South Korea, Japan, China and Russia and each time it has done a deal with one, it has been to the cost of the others.

The north regards its nuclear programme as a matter that only concerns America, although China was particularly angered by the test last year of a nuclear device, which Pyongyang had promised its one-time backer it would not do. But the inter-Korean summit is expected to make the next hurdle in the nuclear negotiations, a full declaration of nuclear assets, easier to surmount .

The North Korean leader Kim Jong-il is striking while the iron is hot, seeking to cull the maximum economic gain from a period of Korean history where genuine change appears to be in the air. But whether he will be able to manage the transition that a formal state of peace will herald is another matter entirely.

–– The Guardian, London

The politics of fear

SOMETHING is wrong with this Congress of the US when a Democratic champion of privacy rights feels compelled to vote for Republican legislation that compromises those rights. That's what California Sen. Dianne Feinstein did last week when she joined a stampede to approve a temporary "fix" sought by the Bush administration in a law governing electronic surveillance.

To be fair, Feinstein wasn't alone in her party in succumbing to deadline pressure and voting for an overly sweeping change in the Foreign Intelligence Surveillance Act (though another prominent Democrat with intelligence expertise, Rep. Jane Harman of Venice, admirably refused to go along). As the clock ticked toward Congress' August recess, Democrats were manoeuvred by the administration into a politically perilous choice.

At a time of increased intelligence "chatter" about possible terrorist attacks on the United States, they could either back the administration's bill, which would allow too much leeway for electronic eavesdropping on Americans but would expire after six months, or leave unaddressed a loophole in FISA that everyone agreed should be closed.

The loophole in question, apparently created by a decision of a secret court that monitors electronic surveillance, prevented the National Security Agency from eavesdropping without a court order on telephone conversations and e-mails electronically routed through the United States even though both parties are abroad.

But both the administration bill and a more acceptable Democratic alternative went beyond solving the "foreign to foreign" problem. Both measures would have made it easier to monitor communications in which one party (the target of surveillance) was "reasonably believed to be located outside the United States." This meant that the NSA could eavesdrop on Americans who were in contact with foreigners, terrorist or not.

Democrats, Feinstein included, are now talking about returning to the drawing board long before the six-month "sunset" of the law. Meanwhile, however, Americans will be ceding more of their privacy with only minimal judicial supervision.

–– Los Angeles Times