Although I concurred – but I tried to play the devils advocate and argued that in 1999 when Gen. Pervez Musharaff took over, Pakistan was on the verge of bankruptcy with only a billion dollars in foreign exchange reserves; 65% of GDP was used for debt servicing. I also reminded him that Pakistani stock market was stuck at 10,000 points and exports were less than $8 billion. In 2006, I told him, Pakistan’s foreign exchange reserves had peaked to more than $16.5bn and rupee was stable at around 60-61 to a dollar. I told him that Pakistan grew at 7% annually under Musharraf , debt servicing was lowered to less than 30% and the Karachi stock market peaked as well. Pakistani exports, I asserted, reached $18 billion and the economy 
doubled in seven years reaching $160 billion from a mere $70 billion in 1999. I also reminded my successful Pakistani entrepreneur that the IT industry in Pakistan was virtually non-existent in 1999 but in the magical seven years grew to $2 billion and employed 90,000 people.

Knowing that I didn’t mean a word of what I said he chuckled and engaged me in a polite debate. He claimed under Musharraf Pakistan had a ‘casino economy’ – and due to adventurism of a dictator and his cronies, trade deficit had increased to a point where balance of payments had become a balancing act. He claimed Musharaf-Aziz ponzi scheme led to higher inflation and exposed banks to a wide variety of consumer loans. Pakistan in those seven years, my friend said, had decaying asset base and only speculative investments were made.  He said it is because of Musharaf-Aziz Ponzi Scheme that Pakistan is facing the worst recession.

I said, hey that’s not fair all at all. Why are you blaming Musharaff-Azia – isn’t it similar to what Bush-Cheney did to the American economy? I reminded him that for first seven years of Bush presidency economy seemed fine. Everything worked like a charm. But one fine morning we woke up with the news flash that the huge debts incurred by consumers around the world and most particularly in the US and UK have increased so much in size that the interest rates had go up to control the borrowing patterns. Many Americans soon realized that each one of them owed these creditors hundreds of thousands of dollars on top of the hundreds of thousands they already owed on mortgages, credit cards and cars. According to the Census Bureau, during Bush’s two terms the US economy lost ground on every major measurement; the median household income declined, poverty increased, childhood poverty increased even more, and the number of Americans without health insurance spiked.

But Pakistan was doing well under Musharaff- I pushed further, and asked him look at the State Bank of Pakistan press release issued in 2008 that says Foreign Direct Investments (FDI) declined by 54.6%, in the first seven months of the fiscal year 2008 with investments falling to only $1.18 billion. State Bank had stated, “investments have fallen to $1.18 billion from $2.59 billion a year earlier. Global funds bought $290.7 million more Pakistani stocks than they sold in the seven months, compared with net sales of $355.8 million a year ago.”

Being the devils advocate that I am – I said, you can’t blame Musharaff – FDIs stopped because of political instability, terrorist attacks, power, gas and water shortage and weak law order control. I said Pakistani firms were unable to sign agreement with foreign investors primarily because of abysmal law and order situation.

My friend reminded me that Pakistan had the highest FDI inflow in 1996. He said, since 1996, when Pakistan received highest amount, FDI has been experiencing a declining trend and pointed out that the share of foreign direct investment, flowing into Pakistan, is negligible- less than one per cent of its total, made globally.

At this point I was at my wits end – I said, you can’t blame Mush for Pakistan’s economic ruins. Global economic recession, and falling profits have caused many companies to cut capital expenditures and reduce FDI.

My friend responded- that’s exactly right; Musharaff can’t take credit for Pakistan’s superficial economic activities between 2000 and 2007. Investors around the world were looking for safe havens to bring their capital without any restrictions to repatriate their earnings, profits, debt servicing, royalties, technical fees and capital. Pakistan was the classic ‘pump-and-dump’ ground for Shaukat Aziz’s investment buddies in the US and Europe.

And, at that moment a light bulb went on; I vividly remembered Shaukat Aziz (who was Finance Minister in June 2003) in New York pitching S&P and Moody’s to increase the credit rating for Pakistan. He was successful. But so were millions of other defaulters – Joe, Jill, Mike, Jesus – sub-prime market was at prime.

I understood why my friend was calling it “Musharaff-Aziz Ponzi Scheme” – because during their rule FDI increased but the domestic savings declined. You don’t need to be an economist to understand what happens when FDI grows and savings shrink – you create a hollow economy that collapse the minute foreign investors pull out. That’s exactly what happened to Pakistan.

Musharaff told his audience in Washington last week that he enjoys popular support in Pakistan. He said, “when I resigned from my presidency, many, many people were crying in Pakistan. There were six cameramen who were filming me and four of them were crying right in front of me and it was a great distraction because I was speaking at that time.”

What he didn’t say is that after he left, nearly 40 million poverty stricken Pakistanis have been crying because of his economic adventurism. Is he popular or infamous?

Despite signs of modest recovery, the State Bank policy statement was skeptical because the economy lacks the necessary infrastructure and sufficient macroeconomic stability to build on the momentum.

Policy statement which sent Pakistan’s leading market, Karachi Stock Exchange running for cover said that the worsening power crisis, and fiscal weaknesses, continue to impede sustainable recovery and comprehensive macroeconomic stability.

KSE-100 index plummeted from 9770 to 9,687 at the end of the session, shedding 183 points.

Overall trading remained on the lower side with only 79 million shares traded in the day. In the first session traders stayed on the selling spree avoiding buying that brought the index down to more than 150 points.

Today’s trading activity displays traders unease with the anticipated amendments in the post budget-trading pattern.

Traders dealt with the situation by readjusting their equity portfolios in accordance with the prescribed limits while the possible buyers holding back to trim down their holdings at available rates.

Trading activity is expected to remain low in the next session.

Foreign investment in Pakistan during the same period last year was $2.21 billion in the same period last year and the current account deficit was $8.982 billion.

Analysts point out that higher current transfers and receipt of logistical support payments from the US contribute to lowering deficit. The US embassy said this month it had released $656 million to Pakistan from its so-called coalition support fund for costs incurred last year in fighting Islamist militants, with $188 million transfered in late April 30 and $468 million in May.

The $188 million is reflected in the current account data for April and analysts said the remaining $468 million will be reflected in May’s data which should show a further narrowing of the deficit.

The trade deficit for the July to April period of the 2009/10 (July-June) fiscal year was $12.24 billion, compared with $14.22 billion in the same period last year.

Analysts said they expected the current account deficit to keep narrowing on falling international oil prices.

“We see a similar trend continuing in coming months with the recent decline in international oil prices further helping lessen pressure on the BOP (balance of payments),” Qureshi said.

Oil fell below $70 a barrel on Monday, its lowest in more than three months, extending a loss of nearly 17 percent over the past two weeks on fears over Europe’s debts, the weak euro and swollen US oil inventories.

Pakistan recorded a provisional current account deficit of $185 million in April compared with a provisional $40 million in March.

In a quarterly report on the economy released in March, the central bank lowered its forecast for the 2009/10 current account deficit to 3.2-3.8 percent of gross domestic product, from previous estimates of 3.7-4.7 percent.

An International Monetary Fund (IMF) emergency loan package of $7.6 billion agreed in November 2008 helped avert a balance of payments crisis and shore up reserves.

The IMF increased the loan to $11.3 billion in July and approved the fifth tranche of $1.13 billion on May 14.

But foreign investment in Pakistan continues to face decline. Out of total foreign investment, foreign direct investment fell 44.7 percent to $1.77 billion in the July to April period, from $3.20 billion in the year-ago period, the State Bank said.

Worsening security situation, with a Taliban insurgency in the country’s northwest, coupled with chronic power shortages, have kept risk averse investors out of the country .

There was a net outflow of $46.6 million of foreign portfolio investment in the first 10 months of this (July-June) fiscal year, compared with a net outflow of $992.6 million in the same period last year.

Authorities imposed a floor on the Karachi Stock Exchange benchmark index in August 2008 as political uncertainity and economic and security worries drained investor confidence.

The floor discouraged new investment and also led to a sharp outflow of funds, as foreign investors sold holdings in off-market trade.

For economies like Pakistan, funds repatriated by non-residents to family and friends back home, provide the most tangible link between migration and development. But September 11attacks, it has become increasingly difficult for Pakistanis to get work visas which had resulted in negative growth of remittances.

Analysts believe that latest increase is due to strict regulation of foreign exchange market. Majority of the informal money transfer and forex firms have changed their business practice or disappeared.

Analysts point out that since remittances are unilateral transfers they do not create liabilities. And they usually come with advice—from migrants who have seen better—on how to best use them. Thus, remittances are not simply money, but value-added money.

NRPs sent $588.78 million in February 2009 compared to $641.32 of February 2010, reports Dollars Magazine. The inflow of remittances in July-February, 2010 period from UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $1,317.17 million, $1,173.37 million, $1,148.86 million, $826.93 million, $596.26 million and $171.41 million respectively as compared to $1,035.55 million, $1,156.51 million, $962.30 million, $783.39 million, $344.08 million and $150.05 million respectively in the July-February, 2008-09 period.

Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during the first eight months of the current fiscal year amounted to $550.65 million as against $486.34 million in the same period last year. The monthly average remittances for the July-February 2010 period comes out to $723.36 million as compared to $614.83 million during the same period of last fiscal year, registering an increase of 17.65 percent.

During February 2010 remittances from Saudi Arabia, UAE, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $149.45 million, $136.88 million, $111.48 million, $89.21 million, $45.91 million and $13.48 million respectively as compared to $123.64 million, $166.62 million, $127.48 million, $93.09 million, $54.12 million and $18.31 million in February 2009. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during February 2010 amounted to $41.13 million compared with $58.04 million in the same month of last year.

The true size, including unrecorded formal and informal flows, is believed to be significantly larger. Remittances total at least three times official development assistance and are the largest source of external financing.

Foreign exchange firms in Pakistan are currently required to report transactions above $5,000 at the close of business every day. Transactions below $5,000 were not the State Bank’s radar previously. However, going forward every transaction will have to report every day.

State Bank’s circular to the exchange companies today said, “Exchange companies would report, on daily basis, all transactions, regardless of amount, made by them on account of sales and purchased over the counter, besides daily reporting of outward remittances.”

Exchange firms are also required to submit daily information about their “contract” transactions of sale and purchase with other exchange firms and authorized dealers. The central bank has also asked the exchange companies that daily statement of FYC cash sales/purchase should reach SBP the same day, latest by 7 pm, as per proper procedure described by the State Bank.

SBP has warned the exchange companies that any delay in reporting will be dealt strictly under related rules and regulations. In another move, the SBP has also imposed condition of producing CNIC and submitting a copy at the time of buying and selling of even one dollar at any exchange company, and now exchange companies would report to SBP with CNIC numbers. Sources said that SBP has taken these steps after continued deprecation of rupee against dollar in the wake of the rising smuggling of dollars to the Afghanistan.

“The smuggling is being made through Chaman and Peshawar border to Afghanistan nowadays, which has created some shortage of dollars in the domestic market”, they said. However, they said, steps taken by the central bank would result in negative impact on the currency market, and people would move to black market. Despite SBP’s actions, the rupee is being depreciated against dollar, and on Wednesday it was being traded at Rs 86.60 per dollar in the open market, they said.

State Bank of Pakistan

Mortgage Refinancing Company (MRC) will be established with the initial investment provided by International Finance Corporation (IFC) of the World Bank and will be controlled by SBP. 20% of the initial investment would be provided by the government.

Director Infrastructure and Housing Finance Department, Mr.Rizwan Pesnani, of State Bank of Pakistan (SBP) said , “The MRC is being set up to build up the confidence of banks and financial institutions.”

He further added that the company would be made functional during the current year as its business plan had already been finalized. He said that the authority had to take positive measures for the proper implementation of recovery ordinance, which had caused the banks to commence disbursement of long term loans for housing sector fully, due to its absurd enforcement. MRC is to facilitate the masses at maximum, he said.

Syed Farhan Fasihuddin, Manager for Housing Finance Advisory Services at IFC, said that SBP and IFC have been working since 2005 for the development of MRC, moreover, MRC would help capital market, which would be launched latest by 2011. He said that in order to bring liquidity in the sector private commercial banks need to be trained for mortgage lending.

He mentioned that mortgage to GDP ratio of Pakistan is 0.7% presently, which is needed to be enhanced. He stated that it costs about eight times of the monthly income of a common person to construct a house.

Zaigham Rizvi, Consultant World Bank on Housing Finance in South Asia, said that WB has played a vital role in creating awareness regarding housing finance in the region. He informed, that newly established South Asia Housing Finance Forum portal,will be of great help in finding unique approaches to cater to the demands of the population. He added, the House Building Finance Corporation (HBFC) disbursed only Rs 700 million in 2009 and suggested the body of Abad to set up a research unit for establishing strong contacts with urban planners.

“So aesthetic and quality housing for the low-income group is a challenge that faces the whole of South Asia including Pakistan where builders need to meet the existing shortage of 8.8 million units,” he said.

Engr. Farooq-uz-Zaman, chairman Abad, said “while our annual demand of housing is 1.5 million we are constructing only 0.6 million.”

He further said, that the population residing in cities will be 65% by 2030, so the prices of houses should be catered down for the rising demand of population.

He said, “we have to transport the connection lines from the grid stations for our projects to that area even if it is 10 km away. And all this cost in borne by us, so we ultimately have to pass this cost to the buyer.”

Addressing a press conference State Bank of Pakistan Governor Salim Raza said inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year.

SBP officials tell us the risks of inflationary pressures due to higher oil prices and electricity tariff adjustments and the high domestic financing needs of the government were the key factor guiding current policy. It is apparent that State Bank has “balanced its desire for a more forceful support of the fragile recovery with its concerns about external stability and liquidity pressures arising from the government’s large domestic financing needs,” say an official privy to the decision making process.

International economists believe that remaining inflation pressures and increased domestic financing of the public sector prevent the SBP from easing monetary policy to support growth.

Governor Salim Raza today said the inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year and inflationary pressure is there due to the increase in commodity prices in international market.

State Bank projects inflation to remain 11 to 12 percent this year – substantially lower that 21 percent that country faced last year.

According to IMF, concerns about low economic activity, weak private credit demand, and lower y-o-y headline inflation point in the direction of an easing of the monetary stance. The SBP proceeded with a reduction of the policy interest rate of 50 bps in November. Staff would have given greater weight to inflation risks and preferred a more cautious stance.

The SBP discount rate was lowered from 14 percent to 13 percent in August, and to 12.5 percent in November, but real interest rates remained positive. The rate cuts were limited because of concerns about remaining inflation pressures, the fiscal slippage in the first quarter, and the availability of external financing.

Governor Salim Raza said Pakistan’s forex reserves are at $15 billion. He said, “the government will have to borrow more loan from banks on account of budget deficit.”

While the government’s domestic financing needs have risen due to shortfalls in external financing, bank credit to the private sector has declined despite cuts in the policy interest rate. At the same time, the government’s high borrowing requirements have pushed T-bill rates from just below 11½ percent in mid-July to 12¼ percent in November. Government borrowing was supplemented by the issuance of government-guaranteed Term Finance Certificates (TFCs) to regularize the debt of the electricity sector companies (circular debt). Significant liquidity injections by the State Bank of Pakistan (SBP) in August–October were made to help meet the financing needs of the public sector and the seasonally higher demand for currency, while keeping the overnight repo rate within the policy corridor.

The present measure has been adopted in the wake of Pakistan rupee losing 53 paisa or 0.6 per cent of its value within 4 days against the dollar as banks began to buy US dollars in advance. Bankers anticipate a further decline in the rupee value as they start financing crude oil imports. Crude imports stood at $4 billion or more than 40 per cent of the overall petroleum imports of $9.5 billion in FY09.

Pakistani bankers estimate this year’s crude imports around $3.5 billion if the global prices remain range-bound and local refineries’ output that declined eight per cent in July-November 2009 does not rebound quickly.(In July-October 2009 crude imports fell to a billion dollars from two billion dollars in a year-ago period due to reduced refineries’ production and lower international prices )

The banks in Pakistan need some $300 million per month to finance crude oil imports.  The rupee depreciated a bit immediately after last announcement and  it may lose some more value in next few weeks unless there are big inflows of foreign exchange.

After the talks between Pakistan and the IMF mission held in Dubai last month, the government is expecting $1.2 billion after the approval by the IMF board scheduled to meet on December 21-22.

But IMF’s Director of External Relations Department Caroline Atkinson has said discussions with Pakistan were in progress, implying that the Dubai talks were not final and that the release of the fourth trance of the $7.6 standby credit might be delayed.

If Pakistan does not get the fourth trance this month a steeper decline in the rupee value of rupees in anticipated in the last weeks of December.

Pakistani bankers also concerned that the year-end servicing of both sovereign and corporate foreign debts would keep the rupee under pressure.

Foreign debt servicing in October-December 2009 was estimated well above a billion dollars, the major share of which was paid in December. In July-September Pakistan spent $1.2 billion on foreign debt servicing despite a roll-over of $450 million.

In July 2008, the State Bank had decided to provide foreign exchange to banks for financing import of crude oil and petroleum products to keep the exchange rates stable amidst inconsistency  triggered by international financial crisis and recession. But it stopped providing foreign exchange for financing of import of furnace oil from February 2009 and for that of petroleum products from July.

Now it has stopped selling foreign exchange for crude oil as well—reportedly to meet one of the conditions of the IMF standby loan—thus restoring the pre-July 2008 arrangements wherein banks were responsible for arranging foreign exchange to finance imports of both crude oil and all petroleum products.

Between February 2009 and 10 December 2009, when banks started financing of furnace oil imports on their own, the rupee has lost 6.8 per cent of its value against the US unit. A senior State Bank official remarked. “This should remove fears that the shifting of financing of crude oil imports to banks would lead to a big depreciation in the rupee value,” He  also added  “The rupee might lose a bit but we neither foresee a major decline in its value nor a serious inconsistency in exchange rates.”

Bankers also dispel the possibility of a speculative attack on the rupee value saying the State Bank is yet to allow forward selling of foreign exchange to importers and thus the question of manipulating exchange rates does not arise. But they say the central bank may allow it sometime next year as the IMF is believed to have raised this issue during talks with SBP authorities.

The sources in the Pakistan Ministry of Finance told Dawn that they are considering entering into currency swap agreements with China and Malaysia for containing the declining foreign exchange reserves. According to the sources the foreign investment has declined by 25 per cent. 

The Ministry has already asked the State Bank to work out a strategy in consultation with the central bank of China for a currency swap arrangement.  

According to a senior official of the ministry ‘China already has such an arrangement with 18 countries and the central bank of Malaysia is also working over this aspect,’   

The figures available at the State Bank indicate that the foreign currency reserves declined by $700 million within the last one month.  

The SBP data indicates that the dollar reserves on Nov 7, 2009 were $14.27 billion and it has dropped considerably to $13.57 billion by Dec 5 and this sharp decline has resulted in the increase of the green back rates to more than Rs84 per dollar.   

According to the plan Pakistan will be approaching the trading partners like China, Malaysia and the like minded countries with proposals for the currency swap. As per the plan the Chinese authorities would pay in rupees for the purchases made by their companies in Pakistan.

Pakistan would ask China to procure yarn in rupees and not in dollars, which is one of the commodities being purchased by Chinese importers in large quantities from Pakistan in recent times.  

Subsequently Pakistan would ask China to sell Pakistani importers machinery and other capital goods in yuan as against the existing arrangement of trading in dollar terms.  

‘The arrangement requires that the central banks of both countries have adequate deposits of each others’ currencies,’ the plan said.   

The plan also said that Pakistan was importing edible oil worth billions of dollars from Malaysia and similar arrangements will be proposed to them to sell edible oil in rupees, while ringgit deposits would be made in State Bank.   

However, the proposed currency swap arrangement is at its initial stage and official of the State Bank told Dawn that it might take some time to prepare for this new option and make it operational with the banking system.