My article on State Bank, published by The Financial Daily today

Time to make SBP completely Independent

Dated: 9th Feb 2012

By: Tarique Khan Javed,
President, Overseas Pakistani Investors Forum

The process of recognizing and accepting the impact of printing of Notes beyond the need, on inflation, which began in Dec 2010, must lead to making SBP completely independent. Talk of giving Autonomy is not enough.

Money supply and Inflation:

I, based on my Economatric model, maintained in 1976, that Inflation in Pakistan can be explained to the extent of 80pc, on extra printing of Notes. I pointed out that the 150% inflation experienced since 1971 when Country was dismembered was explained by the fact that the total money supply of United Pakistan was just 14 billion. It was not reduced atleast by 40% when half of the Country parted away. Instead 8 billion notes were added during next two years. Taking the money supply to 22 billion; instead of say 9 to 11 billion given the curtailment of the size of economy.

 My thesis was published as a Leading Article by DAWN and created some problem for then PPP government. However thesis did not get established. As I, soon got involved in studies and later left the Country for 25 years. On returning back, since 2009, I have been writing and speaking on  Talk shows, about the issue on a regular basis. However I, was not able to make much impact on Public thinking and that of our policy makers. But I persist.

Broken pledges to IMF:

When Pakistan entered the IMF program in Nov 2008, total Government borrowing from SBP was Rs 700 billion. Respectable Mr. Shaukat Tareen as Finance Minister, gave an undertaking to bring it down to zero within a year. By March 2009, the borrowing came down to Rs 350 billion. He had also pledged to cut down Civilian expenditure by 25% and Defense by 15% as part of self imposed Austerity Plan.

His pledges were brutally violated. The borrowing jumped to Rs,1,200 billion and no cut in expenditure was done. He resigned without any formal protest. But later revealed that gross violation of the Covenants he agreed with IMF was the reason for his resignation. Mr. Saleem Raza the Governor of State Bank also resigned due to the same reason but again without taking Nation into confidence.

Critical role of Dr. Shahid Kardar:

When the next Governor of State Bank, Dr.Shahid Kardar in a speech before FPCCI representatives in Dec 2010, maintained that Inflation in Pakistan is mainly a monetary phenomena, he created an uproar which reverberates till today. A Governor of SBP claiming that Inflation in Pakistan can be explained by un necessary printing of NOTES was a historic moment. In that speech he complained that Government was forcing him to print money. He informed that between Oct and Dec 2010, Rs 300 billion notes were printed against his wishes and given to Government as Loan. He informed that the total Loans reached Rs 1500 billion.

Note printing become a Public issue:

Daily printing of Rs 2 billion notes, costing each Pakistani Rs 11.70 every day became a matter of  debate, among Public,  Press, Tv and Parliament. Embarrassed Govt shifted it's borrowing to Commercial Bank and  soon  borrowing came down to Rs 1,200 billion. Sudden awareness of this issue by people created problem for the Government. People refused to listen to old arguments like Inflation upto 12 % is in fact good for the Economy or that International inflation was solely responsible for Inflation in Pakistan. They started to demand reduction in Government borrowing and currency in circulation. This was a positive historic development and argues well for the welfare of the people. As in future Rulers will not be able to take away their purchasing power, simply by printing notes. This cruel and oppressive taxation must be avoided at any cost.

Case of Brazil:

·       In recent history inflation upto 3000% pa in Brazil, devastated the Country and poor became poorer and rich richer. People for long could not understand the main cause of their misery and kept on elected Elite white Leaders while LULU a labour class leader kept loosing election. Finally people got the message and elected LULU, who closed the printing machine and ignited the currency burners. Within 10 years he brought down inflation and stabilized the Country. Now inflation stands at 7%. With direct help to the poor in the form of Income Cards (Benazir income support funds is copy of LULU’s plan in a very small way). LULU could have ruled for ever but left the office after 10 years. Now his Assistant runs the Country.

Case of Zimbabwe:

·       Currently you need one billion local currency to buy 3 eggs in Zimbabwe. Number of times 3 zeros have been removed from the Currency yet carrying notes is a logistically issue. The unbridled printing of notes goes on and there is no end to price rise eroding the purchasing power of the people. The case is eye opener for people all over the World. It proves the point that increase in money supply without corresponding increase in goods and services only lead to adjustment in prices. All currency must be used to buy the available goods and services. When currency is more, the prices must increase to clear the goods and services as money itself is of no use.

Case of Lebanon:

·       During the 15 year Civil war in Lebanon from 1980 to 1995, no tax could be collected. Yet Central Bank continued to pay salaries to the Government staff my printing Notes. The result was massive inflation which eventually impacted exchange rate. Against one USD the rate was four Lira, it dropped to 3,000. People became desperately poor. During my visit to the Country as a Banker I saw once very healthy people turning pale and fragile. I fixed the salary of our staff in USD in 1988. The salary was very low, yet it helped our staff take care of their extended families. After end of the Civil rates improve to 1,500 within few years.

Commercial Banks ran out of funds:

The hue and cry created in Dec 2010 resulted in shifting of Government borrowing to Commercial Banks. So far Government has borrowed about Rs 700 billion while borrowing from SBP has come down to under Rs 1,000 billion.

However it seems that Commercial Banks have run out cash and are now refusing to give any more loans to the government. Thus Government has once again put pressure on SBP to print Notes like before. Latest SBP reports suggest new printing of notes. As a result:

1.    IMF has warned against the trend and recommended an increase in interest rate.

2.    The down ward trend in Inflation witnessed during 2011 is like to be reversed and we may see higher inflation.

3.    Which will translate to higher interest rate and decline in the value of Rupees against other currencies.

4.    Stock market is likely to see down ward trend as rate of deposit is likely to go up in line with expected higher inflation.

Time to march for Independence of State Bank:

It is high time that we as a Nation agree that controlling Inflation should be one of the top priorities to save people dropping further down the poverty trap. Example of how people can be rapidly impoverished are before us. We can not afford to be Brazil or Zimbabwe. To guard against such eventuality we must make State Bank completely Independent like the Judiciary. In my opinion similar struggle by people should be launched to make State Bank independent as we did for Judiciary. The matter is more urgent because people have option to go for JIRGA or direct revenge, if Courts fail them. However they are completely helpless if State Bank fails to protect their wealth, purchasing power, control interest rate and maintain external value of Rupees.  An complete Independent SBP will be able to refuse Governments request for printing of notes beyond the rate of increase in GDP, decide Interest rate and FX policy based on facts not to meet Governments need. This will eventually lead to a Inflation free Pakistan marked by very low interest rate, booming credit and stock markets, stable purchasing power, stable FX rate and huge surge in prosperity.

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