A new prospective at Pakistans Monetary and Economic Policies By Asif Ameer

July 11, 2011

The complexities of the International Financial Markets are abstract by nature but the underlying principles are very simple - Lower the supply, higher the price and vis-versa. Combine this simple rule with the fact that the Government will leave no resources unwasted. The Private sector will always be more efficient (provided there is healthy competition) than the Government. Example is the explosion of the Mobile Phone market after the privatization of PTCL. Combine these simple commonsense ideas and we have laid a sound framework of our Economic Model. National Sovereignty: With that said, lets put our prospective on the word Sovereignty in terms of Economics. Sovereignty gives a sovereign Government 1. The right to issue and maintain its own currency. 2. Taxation 3. Regulate International trades as its agenda dictates (For e.g. Pakistan wouldnt sell arms to India) Money is the medium of trade and the most important aspect of the economy. Almost every empire has failed by mismanaging its money supply. Money shares the same market principles scarce supply higher its value. Issuing money against thin air dilutes the currency. This is the most dangerous form of taxation. This is taxation via inflation. Taxation of this kind effect reduces commerce, encourages hoarding and puts an unfair burden on the already struggling class. Today in principle, Pakistan Government prints against its foreign reserve balance The US Dollar. Dollar itself is created out of thin air. Key to a stable economy is its stable currency. Even in principle, the foundations are flawed. Treating the US Dollar as the foreign reserve currency goes back to the Bretton Woods agreement when the dollar was backed by Gold. West Germany was the first country to withdraw from this agreement after the Gold window was closed in 1971. This action alone translated into West Germanys signs of economic improvement in a matter of three months. The government has it wrong on both fronts Money Supply and Taxation. The Pak Rupee was being backed by Gold via the US Dollar till 1971. It needs to be put back to the Gold/silver Standard to bring in confidence and stability. Gold cannot be printed but minted. This alone will stop the Governments runaway spending.

Implementation of the Gold Standard: Last year, Pakistan booked US $ 17 billion in its foreign reserve. These reserves, that are bought via valuable Exports (Cotton, Wheat, Fish, Fruits, Vegetables, etc), in return Pakistan gets fiat US Dollar which then the Pakistan Government leverages to get more debt from IMF, a subsidiary of the US Federal Reserve, to entertain its bureaucracy. With the way relations Pak- US relationships have been going, it wouldnt be unwise to dump the US Dollar into the International Market and buy Bullion Gold and Silver from it. Make a Public announcement that every issue currency note of Rs 9000 would be backed by 1gm of 24ct Gold coin. Hence the government would buy back its own Rs 9000 note for 1 gm of 24ct Gold. Gold should be priced at a much higher redemption price than market to avoid mass redemption. State Bank should maintain a fixed percentage of Pakistans GDP in Gold reserves. Then default on all its existing international debt. There is nothing immoral about it. World Financial Institutions knowingly financed Pakistan Governments bureaucracy, not its infrastructure. Iceland defaulted too. Sure it was painful in the short run but they have already been upgraded by Fitch Rating Agency and the World Bank, the same institutions that promised doom and gloom if Iceland defaulted. In the meantime, impact of moving to the Gold Standard would change the realities on ground. Imagine going out for grocery and realizing that price of rice, atta and daal have fallen 10% because Gold prices went up compared to the food prices. Electric rates are falling because natural gas and Oil prices are stabilizing. Removal of inflation would fix hoarding of goods. From an international prospective, putting the Pk Rupee on the Gold standard would guaranty a huge influx of foreign capital. Returning monetary and currency stability would immediately bring help the Pk Rupee appreciate, cause commodities prices to fall, reducing inflation.

Taxation and Government spending Along with a strong currency policy agenda, the Government would need to implement fair taxation for the social welfare of the nation. Taxation is best divided on 3 levels 1. Fixed Tax % on the income side this covers the higher income bracket 2. Fixed Tax % on consumption this covers the lower income bracket 3. Imports Tax to regulate foreign trades and policies 4. Set up Bait-ul-Maal discourage idle capital and provide safety net for the society. Government should not spend any more than what it collects in via taxes. Direct taxation is the only form of representative taxation, unlike inflation taxation. Just like a common household, Governments should always run a balanced budget. Nor should the Government be allowed to borrow. This would be a steep contrast to the system in place in Pakistan today where prices are fixed for Petroleum to sugar by the Government. Current conditions are a proof that the statusquo is not working. This will not be easy by any degree because all inefficient systems in the economies will collapse but sounds investments will be made in industries that will no longer rely on Government subsidies. Also this policy will encourage the roll-up-sleeves and get it done attitude of the general public. If a Pakistani can work 16 hrs-a-day in a developed country and remit money back to his family in Pakistan, he will gladly work 14 hrs while living with his family. Opening of the markets will also reverse the on-going brain-drain process Pakistan has been witnessing since the 60s.

Above mentioned points cover policies pertaining to Money Supply and Taxation. Implementing just the Gold Standard will not be enough to fix everything. For the Gold Standard monetary policy to work, the Banking Infrastructure has to be reformed.

Fractional Reserve Lending: Any attempt to reform the monetary system without touching the Banking sector would be pointless. There is a practice in the Banking Industry called Fractional Reserve Lending. When money is deposited into a commercial bank, it is completely legal for the bank to lend out 15~30 times the deposited amount on interest. If a new bank is chartered with an initial amount of Rs 1 crore, that money can be counted as deposit and now the bank can lend out Rs 15 crore, creating Rs 14crore out of thin air, collecting over 8% on the lent Rs 15crore which would be Rs 1.2Crore. Mind it, the initial investment of the bank was 1crore. The bank isnt making 8% on the lent money, its making 120% per year on its initial investment. Not only is it immoral, but this action is a direct dilution of the currency in circulation. This is currency-counterfeiting made legal. If this practice is not outlawed, eventually Private Commercial Banks in Pakistan will asset strip its citizens of every belonging and own the whole nation. This is where banks will end up owning everything and the citizen and its government will be owing everything to the banks. Western countries have already started witnessing this cycle. Putting Pakistan back on the Gold Standard would be rendered meaningless if the Private Banks continue to create its own money. Banning of this practice should include naked short positions in the equity, bond, currency and options markets. These practices are all tied to the Fractional Reserve Lending that causes erosion of private savings and misallocation of resources in the economy. This was the leading cause of the Great Depression in 1930s in US. One wouldnt be off the mark to blame the current Global Financial crises on this practice either. This is no different than stealing private property. Its not clearly visible because the whole society pays the price via inflation. Banks should also reform how they invest savings. Instead of guaranteed profits (interest), Banks should be encouraged to enter partnership. Every entity should have its skin in the game. Western Banking system may be fair for the free-market but not for a free and fair market.

Fallacy of International Trade: Every major industrial sector in Pakistan aims for the International markets even if there remains a severe shortage of goods in the local market. Profitability dictates business decisions. Accept it as a part of life. Fleeing goods from the local market further causes inflation. In return for goods, Pakistan receives inflation by injection of dollar liquidity into the State Bank which pays the exporters in Pak Rupee. Exports do not help Pakistan where it stands today. It is productive to export products with deflationary pricing trend in the local market. With this in mind, everything disqualifies for export in the current market situation. Also Export transactions should be settled in Pak Rs only. Case against importation of Consumer goods is just as strong. This excludes basic necessities. Importation of Capital Goods may cause cyclical deficits but has higher returns for the long time. Taxation and tariffs should be used to accommodate this policy.

A Welfare State: The concept of Government and its role has varied over time and over culture. It always best to keep ideas simple and avoid abstraction. Governments are nothing more than Home-OwnerAssociation (HOA) or a Maintenance Committee. The Association or committee can only work with the funds it has. Providing welfare is essential but it should only be based on a balanced federal budget. Implementing welfare policies on financed budgets is simply an accounting fraud on the nation because it will eventually result in inflation, asset pricing bubbles and so on. Whatever the Government decides to provide for its people, those services have to be funded with direct taxes. The concept of Welfare comes from Islam. But the concept of clarity and cleanliness, especially financial clarity and cleanliness is a big part of Islam as well. Without financial clarity and cleanliness, a welfare state is a failed idea. Issues should not be politicized or funds would not remain in economic grounds, but it would breed a rent-seeking atmosphere. Status Quo: There are basically two political parties in Pakistan that I have witnessed during my childhood. 1. Roti, Kapra aur Makaan. 2. Karz utaro, Mulk Sawaro Mere bhai agar kio roti kapra aur Makaan banaye ga he nahi to kahan se ayega Roti Kapra aur Makaan? There were times when PTCL was run by the Government and subscribers had to wait years to get a phone line. Now imagine the Government being reponsible for Roti, Kapra aur Makaan. Let the People of Pakistan maintain their dignity. Thanks but no thanks! About the other slogan, how can a Government achieve Karz Utaro by importing millions of imported Hyundai, creating trade imbalances and Federal Deficits? Mulk Sawaro - How can a country flourish when its budget is being designed by the IMF - a subsidiary of the US Federal Reserve, World Bank - a subsidiary of the US Federal Reserve, and Charter Accounts working private banks (For E.g. Citibank - a subsidiary of the Federal Reserve) Whose interests will these institutions maintain?

The Role of Media: Speaking to a few politicians, I come to find there are 3 types 1. Those dont understand the matter. 2. Those who get it but its against their interest 3. And those who get it but feel the political cost is too high to speak of these issues, let alone working on implementing them. Sorting out technical issues in Finances and Economics was never a challenge for the human mind. Its the alignment of difference of interests and opinions that causes the rift. The media has a very responsible role in this regards. Atleast one media channel should be created and maintained via public and private donations to foster non-politicized education on Science, History and Economics. Afterall, without education, we are only social animals. Asif Ameer trades Equities, Bonds and derivatives in the International Capital Markets. He can be reached via Twitter @AsifAmeer_AP