Qarz Utaro Mulk Sanwaro : A scam or a fraud?

In Pakistani political discourse, it was continuously mentioned by pro-Musharraf and anti-PML(Nawaz) groups that National Debt Retirement Program (NDRP) infamously known as Qarz Utaro Mulk Sanwaro launched by Nawaz Sharif in his second term to mobilize national (domestic as well as from diaspora) funds to pay off expensive local and/or international debt was a scam as their wasn’t any noticeable reduction in national debt.

Below I present excerpt from State Bank of Pakistan (SBP) Annual Report 2001 (when Nawaz Sharif was in exile and General Pervez Musharraf was ruling as president) so that reader cannot claim that we are talking fudged numbers here.

The National Debt Retirement Program (NDRP) was launched on February 27, 1997 to solicit funds from non-resident Pakistanis (NRPs) towards retiring the country’s external debt. Resident Pakistanis were also allowed to participate in the scheme using their foreign currency accounts, FEBCs, FCBCs, traveler cheques, remittance from abroad or by surrendering hard currency. Deposits in three currencies (US Dollar, Pound Sterling, and the German Deutsche Mark) could be placed in the following:
  • An outright donation with no payback (referred to as NDRP I).
  • Qarz-e-Hasna deposits for a minimum period of two years; no interest payments but principalrepayments could be taken in Rupees or hard currency (NDRP II).
  • A profit bearing deposit for a minimum period of two years (NDRP III).


Table 8.9 shows the total stock from NDRP I, II, & III as of end June 2001. The majority of these donations, Qarz-e-Hasna, and profit bearing deposits were made in the first year of the scheme. Subsequent years have seen minor inflows. As can be seen from the table, the largest inflows havebeen in the profit bearing deposits.

As far as the usage of NDRP funds is concerned, the equivalent Rupees generated under NDRP I & II are credited to the government account with SBP. The foreign exchange component, against which these Rupees are generated, form part of the central bank’s foreign exchange reserves. The federal government has used these Rupees to retire domestic debt of about Rs1.7 billion, which carried a 17.3 percent rate of interest per annum. Inflows from NDRP III form part of SBP’s foreign reserves, while the generated Rupees are credited to the mobilizing institution. For collections in Rupees, the amount collected by commercial banks is surrendered to the relevant SBP local office, which credits the government account on receipt.

Below is a table extracted from SBP Annual Report 2008


National Debt Retirement Program row shows that SBP paid off the funds to the creditors.

Just to put things in perspective, Pakistan’s external debt was in excess of US$ 30 billion and Qarz Utaro Mulk Sanwaro raised around $178million in foreign currency which is equivalent to less than 0.6% of our external liabilities.

When people say that Nawaz Sharif expropriated funds of Qarz Utaro Mulk Sanwaro scheme, they have no idea what they are talking about. That is why, you will see that politicians or journalists do not make such claims on media_electronic or print. Its only their supporters in the general population.

Econ666: Liquidity Crisis in Pakistan

If the possibility of default is not enough to give jitters to Pakistanis, now they also have to worry about liquidity in inter-bank market so that banks might not collapse.

Due to the limits imposed on foreign investments for commercial banks, Pakistani banks are not exposed to subprime crisis in US. However, we have our very own subprime crisis lurking in the shadows due to runaway consumerism such as car loans, credit cards, personal loans and mortgage finance at a scale never seen before. More on consumer debt in later articles.

Its amazing how the current economic managers (Shamshad Akhtar – SBP governor, Shaukat Tareen – Advisor to Finance Minister) are actually ending up screwing the economy. Though SBP by reducing CRR by 100bps has managed to alleviate the situation and proven me wrong, what remains to be seen is what actually caused the crisis. What is amazing is that everyone is to blamed for this crisis as the players range from housewives to finance supremo.

One, It has been claimed by SBP that the liquidity shortage was because of Eid withdrawals. If that is the case then I am really amazed at naivete of the banks  and SBP. Its not like Eid is once in a decade event. Its an annual event. If the banks have not learnt to manage their liquidity during Eid and that is the real reason, then the bank management or at least their treasury should be fired.

Two, rumor mongering and a possibility of default which might lead to free fall in rupee had housewives withdrawing their rupee deposits from banks and converting them to US dollars. The matters were not help by shortage of cash at some branches as no branch is ready for huge withdrawals However, the problem was exacerbated when rumors started flying that certain banks are about to default such as Bank Al Falah etc.

Three, we all know that government is borrowing hugely from SBP and SBP has been raising a flag on the budget deficit for sometime. So what does our advisor Shaukat Tareen decide to do. Rather than cut spending to reduce deficit, he asks Public Sector Enterprises (PSEs) to withdraw deposits and uses those for spending. SBP actually agreed to this proposal. Worst kind of window dressing (voodoo economics) that is possible. Banking system was suddenly hit with huge withdrawals adding to the shortage of liquidity.

Four, its known that inflation is high and controlling inflation is on the agenda of SBP. The monetary policy measures taken by SBP can affect demand pull inflation but they hardly go anywhere in controlling cost push inflation. Nevertheless SBP had been conducting treasury auctions regularly to drain liquidity from the market. If it had any effect on inflation, remains to be seen. What is most shocking was that SBP had also conducted a treasury auction on October 8th, 2008 when the liquidity problem was most acute.

Thankfully, SBP came to its senses and reduced CRR by 100bps which brought in much needed liquidity into the banking system. However, the way the above events have played out, it does not give people much confidence in the financial sector or the economic managers of the country.

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?

Minimum Capital Requirements for Banks

Recently the central bank State Bank of Pakistan (SBP) increased the minimum capital requirement (MCR) for the banks operating in Pakistan. As per earlier circulars, banks were required to achieve Rs. 6 Billion as MCR till December 31, 2009 which at the prevailing exchange rate came to around US$ 100 million.

However, as per the latest notification,

Under the existing instructions, the banks/DFIs are required to have the MCR at
Rs 6 billion by December 31, 2009. According to new instructions, the banks will have
to raise their MCR to Rs 10 billion by December 31, 2010, Rs 15 billion by December 31,
2011, Rs 19 billion by December 31, 2012 and finally Rs 23 billion by December 31,

All newly-licensed banks will henceforth be required to meet the paid
up/assigned capital requirement of Rs 23 billion before commencement of their

Under the current circumstances, when the economy of Pakistan is under duress and there are no signs of rapid growth in near future, this will lead to consolidation among banks small as well as large resulting in halving the 40 plus banks that currently operate in Pakistan. No shareholder will see a benefit in putting in more money as equity capital as in a stagnant economy, increasing the MCR will result in negative return for equity holders.

AB Shahid, an ex-banker whom I respect a lot, has done a decent analyis of the measure in a recent issue of Dawn,

There is some logic in the move. In the unfolding scenario some small banks must merge to create viable entities, but it also raises some questions: is SBP anticipating rapid economic growth and credit expansion or a big rise in bank risk, or having fewer banks to watch will permit SBP to take on NBFIs as well without increasing its current capacity, or curbing cartelisation by mega banks isn’t a challenge now.

I believe its the latter, that SBP does not have the capacity nor the capability to monitor such large number of banks. So to make its monitoring job easier, it is forcing the banks to merge, a wrong way to achieve its objective.

Higher capital indeed enhances loss-absorbing capacity but avoiding losses — the prime objective — requires improving internal and external institutional arrangements to monitor and control risk i.e. inculcating commitment, prioritising expertise and enforcing stiff regulatory discipline.

This is what has been proven time and again both in western financial sector as well as Pakistan. The largest banks in Pakistan are not necessarily the most loss free. For example, UBL is amongst larger banks for Pakistan. Recently, it had been earning significant profits from consumer banking products and was reporting phenomenal results. However, once the economic growth stagnated, it has suffered huge losses in its consumer banking business. Similarly, Standard Chartered (largest foreign bank) has minimized its consumer banking business after incurring significant losses. Compared to it, losses in relatively smaller banks such as Soneri, Bank AlHabib and even Mybank( a nobody) has been contained as due to their smaller size they had better controls and risk management systems in place.

Evidence suggests that the factor causing these failures is lack of relevant experience among central bankers because most of them have only academic, not practical knowledge of running commercial banks.

Though I am not familiar with bio-data of people running SBP but based on the recent handling of events, I don’t have much confidence. However, I would disagree with the author that having an experience of running commercial banks reduces those risks. The recent Treasury Secretary of US is Hank Paulson is a celebrated Investment Banker and under his watch we have seen the end of investment banking as we know it wherein all this time he was in a state of denial.

In a country like Pakistan, smaller banks is what we need as they try to make profit by reaching out to smaller segments of society such as SMEs while helping them to grow. If they consolidate and become big, they will run after the larger corporate where a single transaction can add much more to their top line without the associated costs of having larger branch network.

Having small as well as large banks is what makes the banking sector of Pakistan resilient. All the banks have different target segment, different risk profiles and as such unless they are faced with a systemic risk, a single event will not lead to the collapse of the whole banking sector. But once the banks merge and will become big, they will all modify their exposures to have similar exposure to similar sectors such that if a particular sector fails, it will take down either none or whole of the banking sector.

Once the banks become large, they become bureacratic, they build cartels and are less customer friendly. This is still evident from the rate of returns offered by largest banks to the depositor which in real terms is negative. Smaller banks are customer friendly and offer attractive returns to the customer which induce savings which is what is required in the present circumstances.

Its my belief that SBP despite forcing BASEL II down bank’s throats, SBP does not have the capacity to monitor and manage the risk of banks. As such, to make its job easier, it has decided to impose arbitrarty capital increase requirement in hope that this will some how make the banks safer and less prone to failure.