Pakistan assures support for establishing Asia Infrastructure Bank

ISLAMABAD: Finance Minister Muhammad Ishaq Dar on Monday assured full support to the Chinese government for the establishment of Asia Infrastructure Bank. A statement issued by the Ministry of Finance said Ishaq Dar held a bilateral meeting with Chinese Finance Minister Lou Jiwei during the 47th Annual Meeting of the Board of Governors at Astana on Monday.

The minister also appreciated the proposal for its establishment as it is likely to contribute to the development of infrastructure needs of the region.The minister appreciated the Chinese contribution to the economic development of Pakistan and conveyed the best wishes from the prime minister of Pakistan to the Chinese leadership.

Appreciating the Chinese support for building the economic corridor from Kashgar to Gwadar, both sides agreed to work on an integrated plan for overcoming the difficulties likely to be encountered in the planning and implementation of the economic corridor.

Ishaq Dar assured full support for the initiative of establishing the economic corridor as it will not only reduce the transportation costs, but also result in the development of local regional economies through increased connectivity through enhanced levels of movement of people and goods.

In a meeting with a US delegation led by Marisa Lago, Assistant Secretary International Markets and Development, on the occasion of 47th annual meeting of Board of Governors of Asian Development Bank, Finance Minister Mohammad Ishaq Dar on Monday said that Pakistan was expecting the World Bank to consider Dassu Hydro Project and would appreciate the US support in this regard.

Dar said Pakistan was goingahead with Diamer Bhasha Dam Project which would serve the dual purpose of generating electricity and acting as a water reservoir for both agriculture and flood controls.

The finance minister briefed the US delegation about the structural reforms and stabilization measures undertaken by the present government since its coming into power in June 2013.He informed the delegation that through prudent macroeconomic management austerity measures resorting to external sources of funding and retiring domestic debt obligations the government had been successful in putting the economy on the stable growth trajectory.

The minister suggested the Asian Development Bank (ADB) to adopt innovative approaches for addressing the newly arising challenges through reviewing ADB’s processes, rewarding innovative approaches and by adopting result based lending modalities.

The minister represented Pakistan during the Governor Round Table Conference, in the 47th annual meeting of the ADB Board of Governors at Astana today, said a statement issued by the Ministry of Finance.The theme of the conference was to suggest a role for ADB in handling the challenges currently faced in the Asia and Pacific economies due to different levels of economic development.

World Bank lauds Pakistan

WASHINGTON: The World Bank has forecast fair growth in Pakistan’s economy if domestic challenges are met. In its report released early Wednesday, the bank predicted that Pakistan’s economic growth could increase to 4 percent this year.

State Bank gives warning signals

 

KARACHI: The State Bank of Pakistan has issued some warning signals and praised the economy as well. Its second quarterly report issued on Friday shows Pakistan’s short-term debt is on an upward spiral and is bringing under a cloud the government’s ability to repay this debt.
And headline inflation has increased to 8.9 percent in the first half of FY14, up from 8.3 percent in the comparable period in the last fiscal year.The report comes after a delay of over three months. While critics of the government have been articulating fears that this delay was used to fudge the national growth figures, the SBP has chosen to maintain a stoic silence over this charge.

The SBP report predictably parrots off the government’s usual expectations regarding potential inflows – the release of Coalition Support Fund monies and the materialization of proceeds from the auction of 3G/4G licences before July 2014. Accordingly, says the central bank, an easing up of the fiscal account and a fall off in domestic bank borrowing and debt stock can be expected.

The SBP is advocating the deployment of the February-March 2014 inflows for public sector development programme and thinks this may ease the government’s current financing constraint. However, even so, the SBP is urging extreme caution on the issue of government borrowing.

Reserve Bank warns on housing prices

The governor of the Reserve Bank has warned home owners not to bet that property prices will keep rising especially in the hot Sydney market.

Glenn Stevens says borrowers should be wary about taking on too much debt, reminding speculators that while property prices can rise, they can also fall.

Mr Stevens also said that while current household debt levels were not " disastrous " he'd be worried about an acceleration of credit growth to home buyers.

Business editor Peter Ryan has been listening to Mr Stevens' comments before the House Economics Committee in Sydney and he joins me now in the studio.

Peter, there's been stellar growth in Sydney property prices over the past six months or so. Is Glenn Stevens worried that investors are going to get burned?

PETER RYAN: Well Peter, so far the Reserve Bank hasn't been buying into concerns about a property price bubble especially in Sydney, but in the past the Reserve Bank has said that fears about a potential bubble are "excessively alarmist", but what Glenn Stevens has been saying this morning is that the rapid price growth seen in the late 1990s and early 2000s won't be repeated.

He even went on commercial breakfast television four years ago to appeal to mum and dad investors rather the professional investors about the risks in property.

But now in 2014, interest rates are at record lows and are banks competing for business, so there are dangers that home buyers could borrow too much and get burned when rates start rising, or rising unemployment could create mortgage defaults and falling property prices.

So Glenn Stevens delivered this timely reminder when he addressed the House Economics Committee in Sydney this morning.

GLENN STEVENS: I would repeat what I've said before, then Sydney in particular, but not just Sydney now. There's been a very big run-up in investor activity and that's okay but people need to keep in mind prices don't just rise, they can fall.

They have fallen and we need to be careful that we don't take on too much leverage on the expectation that ever rising prices for the asset make that work out because I think that would be a dangerous assumption.

PETER LLOYD: That's the Governor of the Reserve Bank, Glenn Stevens. In the studio, business editor Peter Ryan.

Now Peter, Mr Stevens also talked about household debt which is an area the Reserve Bank watches very closely. Is that a new danger zone when mixed with rising property prices?

PETER RYAN: Well, the household debt is always a potential danger zone for the Reserve Bank but since the global financial crisis, households have been paying down a lot of debt and in recent years we've been hearing a lot about the cautious consumer and that's been reflected in economic data such as retail trade.

Even so, there's been a gradual pickup in credit to households recently but still that's in the 5 to 6 per cent per year range.

But to use Glenn Stevens' words that "that's not disastrous". That was an interested phrase that he used to show that he's concerned that, if household debt moves up to the next level, and when you combine that with the willingness of banks to lend, we could be into a new era of trouble.

GLENN STEVENS: I don't think we're going to go back to the 15, 17 per cent growth that we saw for many years and I do think if we did see that, we should be asking whether that's wise given the levels of debt that households begin from.

As you know, I haven't been amongst the people who say that the present level of household debt relative to income or relative to assets is disastrous. I'm not in that camp, but I am in the camp that says it's pretty high now and we'd surely be asking for trouble if we see a big step up from where we are.

PETER LLOYD: Reserve Bank Governor, Glenn Stevens before the House Economics Committee in Sydney this morning.

Now Peter Ryan, Glenn Stevens was also asked about the role of foreign investment in driving up property prices in major cities like Sydney. Does he see problems there?

PETER RYAN: Well, Glenn Stevens, he said that he does do a lot of travel through Asia on stopovers through Singapore and for example there he sees there's a lot of interest in Australian property speculation.

But he says that Australians appear to like to being open to foreign investment, and housing investment is after all, a form of that - the same way foreigners buying shares in listed companies here.

Mr Stevens says it can't be beyond Australia's capacity to meet the demands of both foreign buyers and the legitimate demands of Australian citizens but if there was a supply constraint, Mr Stevens said that would be a legitimate issue worth addressing but Mr Stevens said this really comes down to how welcoming Australia is to foreign investment and that is an issue that he appeared to be quite comfortable in handing over to the Australian Government.

PETER LLOYD: And finally did he have any light to shed on interest rates?

PETER RYAN: Well, judging by the comments about property prices and household debt Peter, it seems that interest rates are on hold at that low of 2.5 per cent. Mr Stevens said there would be a period of stability in the cash rate - something he said before but he didn't know how long rates would hold steady.

There was a tiny bit of changed language. In the past Mr Stevens said there might be scope to cut again. Today before the House Economics Committee he said I don't think we need to cut again at this point in time.

Now Mr Stevens has been trying to pull the Australian dollar lower, closer to its long term average of about 85 US cents, but those comments of no more rate cuts actually pushed the dollar as high as 91.11 US cents and it's now a little bit lower but that was a bit of excitement on currency markets this morning.

Appointing the State Bank governor

Despite the restructuring of the State Bank of Pakistan (SBP) over a decade ago, its autonomy question remains unresolved. During the PPP government, two governors resigned due to differences with the then executive. Salim Raza and Shahid Kardar both had to quietly resign rather than resist the temptation of the political executive to spend beyond the monetary policy parameters. The third governor, who recently resigned due to personal reasons, continues the trend.
There is a strong argument that elected governments have to deliver on their promises of patronage, given how the political system works. However, without generating sufficient revenues and reforming the taxation system, the expenditures emanate from reckless deficit financing, i.e., printing of notes. This is why Pakistan has witnessed some extraordinary bouts of inflation. Price levels have been rising since the present government took over and only recently they have stabilised. Whatever the finance minister may have said (e.g., hoarding causes price hikes), it is well known that fiscal improvidence and monetary expansion are contributing to inflation. One way to tackle this trend is to enhance the policy rate but this impacts the credit needs of the private sector.
Borrowing nearly Rs2 billion a day from the SBP cannot be a prudent or sustainable option. Of course, in the short term, raising revenues may not be possible but the government has to set limits. This is what the SBP has been prescribing. Pakistan’s recourse to the IMF in recent years has resulted in a situation where nearly 25 per cent of the annual budget is reserved for IMF debt repayments.
The erosion in the value of the rupee has further increased the value of foreign debt close to Rs500 billion. Each time the government intends to tighten the monetary policy, it increases its domestic debt burden as it happens to be one of the biggest borrowers from the central bank. There is no option but to pursue a tighter fiscal policy with a controlled monetary expansion. Therefore, a robust and an autonomous SBP is vital for economic management.
The departure of the SBP governor is not a good sign. There seems to be a regulatory void in the country as the key appointments in various regulatory authorities are vacant. Few are disputed in courts and the ‘loyalty’ test is being applied on potential candidates. It would be a travesty if the SBP is treated as just another government office, for it simply is not.
The SBP’s primary role is to issue notes, act as a regulator of the financial system, as the bankers’ bank and as banker to the government, as well as setting the monetary policy. It is also a key actor in managing public debt, foreign exchange and acts as policy adviser to the government on its economic relationships, especially that with international financial institutions. By no means is it a commercial bank as many — including those in the political elite — view it to be. The Musharraf government imported a good commercial banker as the finance minister. This betrays a limited understanding of the way economic policymaking works and why it is important to have professional and experienced economists who can think beyond the imperatives of balancing the books and marketing brands of their ‘success’. The Musharraf bubble burst even before it could be branded and today, many of our economic woes are directly linked to what happened during the period 1999-2007.
Dr Ishrat Husain, as a competent manager of the central bank, turned it around and its internal restructuring remains one of our recent success stories. By attracting good professionals and encouraging many to pursue higher education, the SBP has a good team available. This is why its next governor needs to be an economist, and not a financial wizard, to lead the institution and furnish pertinent advice on macroeconomic policy to the government. The SBP is not an attached wing of the finance ministry nor is it a platform to reward a loyalist. Its governor has to provide independent advice, as well as regulate the financial system’s operations. It is hoped that the government would resist the temptation to treat it as just another appointment.