01-19-2009, 08:19 AM
By A.B. Shahid
AS the harsh realities of 2008 unfolded, the world discovered how inadequate in scope was the regulation of financial markets, given the extent to which these markets were ‘freed’ after the annulment of the Glass-Steagall Act in 1999, and the way the move impacted global financial markets.
However, this discovery doesn’t owe itself to the regulators waking up but to the crisis caused by the oil price hike that eroded the vulnerable profitability of businesses globally – sadly, all dependent on cheap oil. It also revealed the recklessness of lending by commercial and investment banks that pumped, seemingly, the biggest financial bubble in human history.
Banks compounded the impact of reckless lending by shifting the loan default risk on to others and those taking on that risk, principally through Credit Default Swaps, hardly knew the borrowers. Greed was at its zenith reflecting on the quality of education being imparted by business schools that inculcated a dangerous mindset: “everyone for himself and God for us all.”
The bitterest outcome was that globalisation of trade made economies dangerously dependent on each other and escalated the systemic risk. Bigger the economy, more widespread has been the fallout from its decline. The US – the biggest of them all – finally discovered that it could no longer fund its economy with borrowed money – its way of life since the 1970s.
All this leads to one conclusion: while nations must continue to trade their surpluses with each other, they can’t bank on trading with select foreign markets. That, in the years to come, self-sufficiency in vital sectors will be the only guarantee of surviving the painful end of future economic cycles characterised by over-exuberance.
A secure (not excessive) level of self-sufficiency or self-reliance assures surviving the turmoil that follows the bursting of market bubbles; most economies overlooked this fact to their collective detriment. The fault lies with policy makers and market players but suffering there from is humanity’s fate. Now both policy makers and market players are reacting by resorting to
extreme measures.
On January 14, bank bids (Rs190 billion) for buying T-bills far exceeded the SBP target (Rs71 billion). The development shows that either banks have yet to comply with the significantly lower SLR, or they are unsure about their risk assessment capacity, and prefer lending only to zero-risk borrowers (i.e. the state). This unwise response could starve businesses of the needed funding support.
The priority should be revival of the saving habit to mobilise the resources for energising the economy. This will also ease demand pressures and steadily lower inflation. Raising the cost of credit (more to compensate for future losses than to cut inflation) is preventing the production of most goods at prices affordable by consumers; it will shut more business and increase poverty.
Unfortunately, this outcome is being ignored. Financial institutions, especially banks aren’t taking the challenge seriously. Small savers – the largest saver group – are still getting a raw deal. In spite of the global economic meltdown that squeezed everyone’s earnings, banks want to continue earning profits that were never fair (as proved later on) because they steadily eroded industry’s competitiveness.
Bank deposit growth in 2008 over 2007 could be seven per cent – sharply below its average of 22 per cent a year during the 5--year cycle beginning 2003 but even then the overall savings stayed below 14 per cent of GDP although economists insisted that, for surviving in the 21st century, savings must rise to 21 per cent of the GDP to plug the gaps in infrastructure.
Unless these gaps are plugged, an economic turnaround is impossible because we no longer have the clout to attract meaningful foreign investment or credit. Given the global financial mess that seems unmanageable for most countries, in the medium term (next 3 - 5 years) Pakistan will have to rely on domestic savings; the higher they grow, lighter will become the burden of reviving the economy.
Simultaneously, we must reorder our investment priorities to channel savings into ‘optimally’ productive venues to ensure maximum returns without causing negative fallout on any other economic sector – an objective sidelined in the blind pursuit of profit. The classic example thereof was the lure of cheap
imports that shut scores of import
substitution industries.
By now, it should be obvious to the policy makers that the priority should be self-sufficiency in food. Also, that the one item whose exports won’t fall is food – grain, fruits, dairy items and meat, both raw and processed, and
the one item which can be produced abundantly (given the current levels of literacy and vocational skills) is also food.
But achieving higher productivity in agriculture and related sectors requires huge investment to assure self-sufficiency in water availability, and production of high quality seeds, fertilisers and pesticides, as well as food processing, packaging and storage, and specialised transportation. This investment could open up enormous opportunities for a host of dwindling industries.
Indications are that investment for local-foreign joint ventures in assembly/manufacture of specialised transport vehicles, storage facilities, food processing and packaging plants, construction, and power generation would be forthcoming despite the country’s current predicament. The reason is that the prospects of success of ventures in agriculture sector are the brightest.
The biggest benefit will be that this investment will generate employment opportunities in rural areas and rapidly reduce migration of the unskilled labour to overcrowded cities. Following investment on the above lines in the agriculture sector, this huge chunk of population too will enjoy a better standard of living that it deserves like all other citizens.
But none of this can materialise unless we focus on optimising savings for which banks and NBFIs must play their role. The institution that can mobilise the crucially important medium-term savings is the National Savings Scheme (NSS) but it continues to suffer from capacity limitations in terms of its network and internal systems improving which, very oddly, did not engage the focus of any regime.
If nothing else, NSS can again utilise the huge bank branch networks, this time by setting up its own desks in the branches under a workable contract with the banking sector but it can’t lag behind in mobilising savings. The nation must learn to depend on its own resources. Friends of Pakistan have too many problems on their plate to come to our rescue; we must adopt self-reliance as the lifestyle.
http://www.dawn.com/2009/01/19/ebr1.htm
AS the harsh realities of 2008 unfolded, the world discovered how inadequate in scope was the regulation of financial markets, given the extent to which these markets were ‘freed’ after the annulment of the Glass-Steagall Act in 1999, and the way the move impacted global financial markets.
However, this discovery doesn’t owe itself to the regulators waking up but to the crisis caused by the oil price hike that eroded the vulnerable profitability of businesses globally – sadly, all dependent on cheap oil. It also revealed the recklessness of lending by commercial and investment banks that pumped, seemingly, the biggest financial bubble in human history.
Banks compounded the impact of reckless lending by shifting the loan default risk on to others and those taking on that risk, principally through Credit Default Swaps, hardly knew the borrowers. Greed was at its zenith reflecting on the quality of education being imparted by business schools that inculcated a dangerous mindset: “everyone for himself and God for us all.”
The bitterest outcome was that globalisation of trade made economies dangerously dependent on each other and escalated the systemic risk. Bigger the economy, more widespread has been the fallout from its decline. The US – the biggest of them all – finally discovered that it could no longer fund its economy with borrowed money – its way of life since the 1970s.
All this leads to one conclusion: while nations must continue to trade their surpluses with each other, they can’t bank on trading with select foreign markets. That, in the years to come, self-sufficiency in vital sectors will be the only guarantee of surviving the painful end of future economic cycles characterised by over-exuberance.
A secure (not excessive) level of self-sufficiency or self-reliance assures surviving the turmoil that follows the bursting of market bubbles; most economies overlooked this fact to their collective detriment. The fault lies with policy makers and market players but suffering there from is humanity’s fate. Now both policy makers and market players are reacting by resorting to
extreme measures.
On January 14, bank bids (Rs190 billion) for buying T-bills far exceeded the SBP target (Rs71 billion). The development shows that either banks have yet to comply with the significantly lower SLR, or they are unsure about their risk assessment capacity, and prefer lending only to zero-risk borrowers (i.e. the state). This unwise response could starve businesses of the needed funding support.
The priority should be revival of the saving habit to mobilise the resources for energising the economy. This will also ease demand pressures and steadily lower inflation. Raising the cost of credit (more to compensate for future losses than to cut inflation) is preventing the production of most goods at prices affordable by consumers; it will shut more business and increase poverty.
Unfortunately, this outcome is being ignored. Financial institutions, especially banks aren’t taking the challenge seriously. Small savers – the largest saver group – are still getting a raw deal. In spite of the global economic meltdown that squeezed everyone’s earnings, banks want to continue earning profits that were never fair (as proved later on) because they steadily eroded industry’s competitiveness.
Bank deposit growth in 2008 over 2007 could be seven per cent – sharply below its average of 22 per cent a year during the 5--year cycle beginning 2003 but even then the overall savings stayed below 14 per cent of GDP although economists insisted that, for surviving in the 21st century, savings must rise to 21 per cent of the GDP to plug the gaps in infrastructure.
Unless these gaps are plugged, an economic turnaround is impossible because we no longer have the clout to attract meaningful foreign investment or credit. Given the global financial mess that seems unmanageable for most countries, in the medium term (next 3 - 5 years) Pakistan will have to rely on domestic savings; the higher they grow, lighter will become the burden of reviving the economy.
Simultaneously, we must reorder our investment priorities to channel savings into ‘optimally’ productive venues to ensure maximum returns without causing negative fallout on any other economic sector – an objective sidelined in the blind pursuit of profit. The classic example thereof was the lure of cheap
imports that shut scores of import
substitution industries.
By now, it should be obvious to the policy makers that the priority should be self-sufficiency in food. Also, that the one item whose exports won’t fall is food – grain, fruits, dairy items and meat, both raw and processed, and
the one item which can be produced abundantly (given the current levels of literacy and vocational skills) is also food.
But achieving higher productivity in agriculture and related sectors requires huge investment to assure self-sufficiency in water availability, and production of high quality seeds, fertilisers and pesticides, as well as food processing, packaging and storage, and specialised transportation. This investment could open up enormous opportunities for a host of dwindling industries.
Indications are that investment for local-foreign joint ventures in assembly/manufacture of specialised transport vehicles, storage facilities, food processing and packaging plants, construction, and power generation would be forthcoming despite the country’s current predicament. The reason is that the prospects of success of ventures in agriculture sector are the brightest.
The biggest benefit will be that this investment will generate employment opportunities in rural areas and rapidly reduce migration of the unskilled labour to overcrowded cities. Following investment on the above lines in the agriculture sector, this huge chunk of population too will enjoy a better standard of living that it deserves like all other citizens.
But none of this can materialise unless we focus on optimising savings for which banks and NBFIs must play their role. The institution that can mobilise the crucially important medium-term savings is the National Savings Scheme (NSS) but it continues to suffer from capacity limitations in terms of its network and internal systems improving which, very oddly, did not engage the focus of any regime.
If nothing else, NSS can again utilise the huge bank branch networks, this time by setting up its own desks in the branches under a workable contract with the banking sector but it can’t lag behind in mobilising savings. The nation must learn to depend on its own resources. Friends of Pakistan have too many problems on their plate to come to our rescue; we must adopt self-reliance as the lifestyle.
http://www.dawn.com/2009/01/19/ebr1.htm