Econ666: How not to manage the emerging market economy?

I don’t know why we Pakistanis think of the locally educated or locally trained professionals as inferior and are so smitten with foreign bankers. Whenever we have imported anyone, he had no idea of ground realities, experimented with the economy and left without investing his single penny in the country. If we have to resort to hiring bankers only, I am sure we can find some expert local banker or are we implying that this land is incapable of training and honing talent.

Shaukat Aziz we have already covered in earlier post. At the receiving end of my wrath now is another legacy of Musharraf era, Governor of State Bank of Pakistan (SBP) Shamshad Akhtar, someone who was unqualified to hold the top post which called for a trained economist whereas she built her career in Operations. Her only qualification was that she worked for a multilateral organization namely Asian Development Bank (ADB).

She seems focused on implementing textbook policies that might have worked in developed economies but are not relevant or effective in Pakistan recent example of which is her instruction to increase the minimum capital requirement (MCR) of banks.

Her latest fiasco is handling of liquidity crisis in banking sector of Pakistan. Banks are running out of cash faster can they can replete their reserves. Two reasons:

  1. Depositors had withdrawing a lot of cash during the Eid season
  2. With declining value of rupee, whoever can withdraw money has done it and is converting it to foreign currency.

Though as per official statements, the exhange rate is Rs.81/$1 i.e., you can buy 1 dollar for 81 rupees. However, no one will give you dollars at that rate. The actual rate in the kerb market is Rs.83/$1. To think that SBP was actually thinking recently of pegging rupee to the dollar requires wild imagination. Somebody please tell SBP governor that people have started losing faith in SBP. Fixing the exchange rate might solve the problem in economic textbooks but when panic strikes, nobody is going to sell you $ at Rs. 81 whether fixed, managed floating or floating. She might as well peg it at Rs. 75/$1.

Due to the shortage of liquidity overnight interbank call rates (the rate at which banks lend to each other to meet SBP requirements) had shot up. Though SBP had conducted Open Market Operations this week to ease liquidity, whats amazing is that SBP actually went ahead with a Treasury auction (which was rejected due to sufficient bids not received). I mean at one end we are trying to inject liquidity through OMO and on the other hand we try to suck away that liquidity by auctioning treasuries. Mind boggling…

Desperate times call for desperate actions. You don’t try to resolve crisis in piece meal reducing cash reserve requirement (CRR) by 1% this month and another 1% after one month. If the 1% is not effective in solving it right now, you cannot wait one month to reduce it further. You will do it right away and that will reduce the credibility of SBP that it doesn’t know hot manage the economy (which will not be far from truth).

For those of us who had to taken Econ102 (Macroeconomics) there are two types of inflation. Demand pull and cost push. Monetary policy like increasing interest rates, CRR or draining liquidity from the market through OMOs etc can have some impact on reducing demand pull inflation but it has negligible impact on cost push inflation. Pakistan is facing cost push inflation due to rising fuel and commodity prices and under such circumstances, the only efforts SBP had taken (prior to current crisis) are to increase CRR/SLR and increase interest rates which are totally useless under such circumstances.

Another volteface according to Business Recorder,

Governor said that banks have been advised to launch more aggressive efforts to mobilise deposits including extension of their outreach in rural areas. Offering adequate real returns on deposits would help banks alleviate any bank specific liquidity shortages.

This goes against SBP policy of encouraging consolidation among banks by raising the MCR because then banks will not have any incentive to increase deposit or extend outreach as it becomes marginally unprofitable for large banks to engage in such activities. Does SBP have any idea of its myriad actions/instructions?


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