Dr. HS Agrees to Bat on Sticky wicket?

DR.Hafeez Sheikh, welcome back home. Though the ground is not new, but the surface is quite different this time. You have to bat on a wet sticky wicket and have to make sure that you to score quick runs to win the game for two reasons. 

Our PM made a commitment that this is going to be the last IMF outing (21st time). Secondly your record suggest that your stay has never exceed beyond 2-3 years that needs to be extended for longer duration, as PTI government still has 50 months for completion of its full term.

Although the checklist can be stretched multifariously, here is my comprehensive list of “Things to Do” that will surely assist to bring economy back on track, as the country is about to sign IMF deal. All terms and conditions should be in writing and the agreement should be made public.  

-IMF should release funds annually in 3-installments. Minus China, Pakistan should be allowed to manage its funding need and decide when and where to place credit balance in AA rated regulated financial institution that offers better return.   

-Rupee adjustments should no more be made on outdated REER calculation, as 30-years trend of TRADE, BOP & DEBT suggest that it is a failed formula & hence SBP should itself  manage exchange rates based on market conditions/demand.

-Pakistan should not compromise on its Exchange Rate Mechanism from Managed Float to Flexible Exchange Rate or else Rupee volatility and its bashing will be unimaginable because then SBP will not have a say, as it will be the demand supply factor that will determine the currency move. The truth is that even Free Float currencies of developed economies get outside support from the corresponding Central Banks, which does not suit in Pakistan case.  

-To support growth & stimulate Pakistan’s Economy, SBP Policy Rate should be based on Global Practice and in line with FED, BOJ, BOE & ECB stance, as seen over a decade and hence, Pakistan’s Central Bank should also OPT for ULTRA MONETARY POLICY STANCE for a minimum period of next 10 years that will help to kick start growth & slow down pace of fast rising debt. 

Italy, Spain and Portugal’s refusal after the 2009 European Crisis to accept IMF’s money on condition that they will have to opt for austerity measures and reduce deficit had proved IMF wrong, as all three economies are back on track or are performing to a satisfactory level by refusing to take IMF money because of its harsh lending condition.

-Private and Agriculture Sector Bank Lending Target should initially be Rs 2 Trillion each (Rs4 Trillion) with 25% increase in target in a New Fiscal Year. 

-Risk is Low economic activity will continue to push Pakistan towards the wall, as population growth is well above 2% and with poverty rate of over 30%, it demands sharp economic growth of over 8%, which is achievable, if banks expand their balance sheets. Sharp growth will assist in creating new jobs and help to increase its Tax Collection increase in manifolds. 

-Therefore, unlike past, instead of preferring to go for Open Market Operation (OMO) to encourage Banks to buy Government Paper with the purpose of window dressing. SBP should instead inject liquidity of up to Rs 4-5 Trillion annually in the Banking System.

-Huge liquidity injection at cheaper rates due to ULTRA Monetary Policy Stance will give space to Banks to encourage stimulating Manufacturing and Industrial Sector, including Housing Sector. It will also assist banks to diversify its lending portfolio. Investment by banks in T/bills, Bonds and Islamic Papers should be capped at 30%, as banks have to place 5% CRR with SBP or else the whole exercise become meaningless. To make this scheme successful it will be essential for SBP to further widen the CORRIDOR (Caps & Floor) by another 75% minimum. Economy will surely witness Multiplier effects, if the stance is adopted.

-Electricity and Gas rates should not be further hiked. Instead stronger Rupee will provide enough space to reduce the bills that will bring down inflation at all levels.

-Cap should be put on Derivatives that has reached alarming level of all time high of $ 7.7 Billion. Only substantial increase in economic activity can be reduced this number at a faster pace. Target should be to reduce this amount by nearly $ 3 Billion the end of PTI government’s term. 

-There is another Exposed entry known as “Unfunded Debt” in SBP Books. Since 2009 it has risen by nearly Rs 2 Trillion from Rs 1.1 Trillion to Rs 3.036 Trillion (current). This is one good example of the trend that I can quote to support my point of view that  why Unnecessarily Extraordinary Higher Policy is the cause of sharp surge of Domestic DEBT. This needs to be checked and corrected at earliest through shift in Policy Rate.

-IMF’s version on Short Term Deposits taken & Oil Deferred facilities offered by Saudi Arabia, UAE & China should be made public. IMF should give in writing that it will not interfere if country deiced to ROLLOVER the deposit, which is entirely Pakistan’s prerogative. 

-IMF should assist and give an understanding about its role in helping Pakistan to get rid of FATF Grey listing.

-Pakistan will surely be requiring Wavers at all cost, as it may not be able to meet IIMF’s target on regular basis. Overall it may need 15-20 wavers in 36-months period. The areas will include Money Supply, Revenue Collection, Privatization, Circular Debt, Fiscal Deficit, Electricity, Gas, Petroleum, Inflation, Policy Rate and Exchange Rate. Pakistan is surely faced with a daunting task. It can immensely reduce the pressure and get rid from the curse of evil eye by taking few tough and extraordinary measures.

-No matter how much increase is seen in commodity prices, Pakistan’s FY 2019 inflation rate will not surpass 7.35% and may end up around 7.2%. Policy of 10.75% is a sin. For change in stance to adopt Ultra Monetary Policy Stance, Policy Rate should be immediately slashed by 300 basis point and gradually further cut in coming SBP’s 2-monthly MP Or else Prime Minister’s blame that Debt has reached Rs 30 Trillion for RS 6 Trillion will make no sense, as his governments policy has already helped Debt to rise by nearly Rs 3 Trillion in 8-months.

-I have always argued with examples and providing evidence that Depreciation of Rupee is a faulty policy, which is on based in REER. Rupee should be gradually strengthened by 25%. It will sharply bring down the External Debt number. Food, Medicines, Rents, Cars and Bikes, Electricity, Gas, Petrol prices and others can be adjusted lower by 20% to 25%.      

-Documentation of Economy = No transaction/deals should be allowed without having official status. Anything not within the official boundaries should be punished.

-Demonetize Rs 5000 & Rs 1000 Currency notes by giving 12-months period for change of currency notes with the bank where account is maintained. Government has to ensure and come up with a strategy for change of currency notes of higher denomination that should be worked out with the tax authorities.

I think timing of Dr Hafeez Sheikh’s entry could be a blessing in disguise, as Pakistan needs a quick fix solution rather than anything else. When PTCL was sold, the government received part payment. He was then heading the Privatization Ministry. The deal still remains unsettled and Pakistan badly needs its money back, now the nation needs his services badly and expects him to bring back the stuck up $ 800 Million outstanding sale proceeds. It was also during his tenure as FM that IMF has to scratch last two tranches.

Therefore, this time I am quite hopeful and optimistic too that he will not succumb to IMF pressure and would fight for Pakistan’s cause and will make every effort to protect Pakistan’s interest and if needed he will once refuse to surrender to IMF’s vague demands.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).