Less than a month ago, a press report pointed to a gradual decline in inward foreign remittances — a flow that was earlier cited as the proof of a favourable perception about Pakistan’s country and investment risk.

The decline in foreign remittances has been blamed on unrealistically low profit rates on bank deposits currently being offered by banks in Pakistan. Interestingly enough, perception about Pakistan’s improved or worsened country risk was not referred to by the report.

Let us first examine the validity of the logic — lower inflation — the basis for the monetary managers to push for rapid lowering of the interest rates. In the past fortnight, there have been some scintillating disclosures: in the last four years fuel prices shot up by 100 per cent, and power and gas tariffs by an even higher percentages. It is a mind-boggling proposition even for the modem economist (let alone the completely nonplused ordinary mortals like you and me) to accept the miracle of a significant drop in inflation while both energy and fuel prices have doubled.

But the miracle has “happened”, say the economic managers of Pakistan. A top-ranking official was annoyed with me because in one of my articles I had commented on the rise in inflation on an annualized basis. According to him, I lacked an appreciation of how change in inflation is calculated and accorded its due place in a monetary policy review. He was right; present-day economists calculate changes in inflation on a month-on-month basis (preferably even shorter intervals). God alone knows, why.

What they won’t admit, though, is that this format helps them report only the fractional impact of changes in inflation because if the cumulative effect of several months is taken into account it could add up to a large (and politically embarrassing) figure. What the economists don’t appreciate, however, is the fact that for the man in the street, incomes don’t rise on a month-to-month basis. To him what pinches is the cumulative rise in inflation. Apparently, modem economic theory treats him as a low-priority variable in economic model formulations.

For lowering interest rates, however, “low cumulative” inflationary growth was touted as the “economically logical” justification. But revelations about consistent rise in fuel and energy prices shake that basic premise. Inflation is most certainly higher than what we are being made to believe. The view that prices have not fallen is further strengthened by the absolutely baffling profit growth being reported by companies, almost daily since early 2003.

This other miracle — the one in corporate profitability - manifests that companies are now proud of making higher profit rather than improving the quality or utility of their products, or reducing their prices. A contest now seems to be on about reporting higher profits — a sign of blatant capitalism taking over the psyche of our business managers.

The radical turnaround in corporate profitability (especially the energy sector), has been supported by unrealistically low borrowing rates made possible by rapid lowering of profit rates on savings, and strengthening of the exchange rate of the Rupee. What these crutches are supporting is a largely inefficient industrial sector (though with some remarkable exceptions) that now thrives at the expense of the common man and the State (don’t forget the state-subsidized credit facilities and the state-managed exchange rate of the Rupee).

Lowering of profit rates on bank deposits, that are the same or lower than those available in Western economies, is a grave miscalculation on the part of Pakistan’s economic managers. It gives the impression that Pakistan is at par with developed countries in terms of economic soundness, has a strong freely trade-able currency, faces no serious internal or external threats, and therefore doesn’t need to pay a risk premium over the profit rates available on savings in the developed countries. While we delude ourselves with this assessment of Pakistan’s country risk, even in the West, market players expect a moderate rise in interest rates since lower rates failed to spur economic growth.

Pakistanis would be delighted if this risk perception was even partly true. A cursory look at the foreign press, or listening to commentators on BBC, CBS, ABC, CNN, etc., (who name Pakistan after Afghanistan as a terrorist state) should leave no one in doubt that Pakistan’s country risk perception will remain negative, at least in the medium term. It is therefore logical that foreigners placing their savings in Pakistan very fairly expect a risk premium over the profit rates they get in more secure countries. But the current profit rates on bank deposits offer nothing of the sort.

We seem to be taking a blinkered view of the future. Being short on ideas, and therefore groping in the dark about how to use the liquidity that has already made its way to Pakistan, we seem to be telling the world “enough is enough, no more remittances please.”

This is a bad policy. What we need to do right now is to build lasting bridges with savers and investors abroad that can ensure against a reversal of the inflow of foreign funds when international security concerns begin to subside. What we need to do is to make these funds work and produce value that is more than adequate to pay the investors a risk-weighted return.

Writing for a professional journal earlier this year, I had pointed to the possibility that countries from which this wealth is being drained out are unlikely to remain oblivious to this trend. Presently they may be over-occupied with security concerns but eventually they will address this issue as the consequences of over-occupation with security concerns begin to manifest themselves in an economic downturn. Secondly, faced with segregation on the basis of religion and nationality, many Pakistanis are returning home. It may, therefore, be overoptimistic to assume that the flow of foreign remittances will continue forever at its current pace.

Bankers carry the major share of the blame for being short on ideas about investment. It amazes many discerning observers that banks are falling over themselves in undercutting each other in financing vehicle leases knowing full well that auto assemblers can’t deliver the vehicles being leased. That this mad race has spurred black marketing at a level hitherto unknown in Pakistan.

That Pakistan’s big cities don’t have the road networks that can accommodate vehicular traffic that will surface once all these vehicles come on road. Finally, bankers don’t seem bothered about the environmental pollution that the caravans of these vehicles will unleash on already congested city road networks.

It hasn’t occurred to bankers that what Pakistan’s overcrowded big cities badly need are overhead railways. To make use of the liquidity that they seem to be overawed by, why don’t banks offer large syndicated loans to private sector operators (local-foreign joint ventures) for setting up these projects adequately secured by constitutional guarantees that their ownership will not be fiddled with by any future government? Are they just short on ideas or are they worded about the government’s credibility? Don’t they praise day in and day out the investor-friendly character of the present government?

Financing public transport is just one of the many areas in which infrastructure needs to be strengthened. There are many more that require re-furbishing or being built afresh. Isn’t it far better to finance them rather than indulge in the risky business of consumer financing and unwittingly support the rapid rise in household debt? None of them appears to note that disproportionate rise in household debt quickly leads to negative equities that suffocate consumer demand for decades.

What they are indulging in is a grave miscalculation. More than once it led to economic failure in the West. Bankers must adopt a futuristic approach for their profession by financing ventures of lasting benefit to the society that help raise living standards on a sustainable basis. Social responsibility demands investing in ventures of common good, not just financing individuals.