Look Beyond ‘Patchwork’ Reforms

Zafar Masud of the Bank of Punjab is an oddity among bank CEOs. After all, which other top banker would endorse the ideas espoused by Thomas Piketty, a radical French economist who western liberals derisively call Karl Marx 2.0?

Closer to home, Mr Masud’s proposed solutions to economic problems are equally unconventional, at least by local standards. On issues ranging from privatisation and exchange rate management to the subsidised financing for businesses during Covid-19, he stands miles apart from the rest of the C-Suite crowd of Chundrigar Road.

Speaking to the students and faculty of Habib University on Friday, Mr Masud said letting the exchange rate float freely can be disastrous for the economy, even though fixing it at a certain level isn’t a solution either. “I believe in moderation. Both extremes are bad,” he said.

He referred to China and Vietnam as successful economies that’ve built exportable surpluses by keeping their currencies undervalued for a long time. But Pakistani policymakers took the opposite approach and kept the currency overvalued. The practice encouraged imports at the cost of exports, which resulted in an unending boom-bust cycle.

A few years of relatively high economic growth increases imports disproportionately and drains foreign exchange reserves. The country goes to the International Monetary Fund (IMF) to seek dollars. The IMF bails it out after some economic “patchwork” that “follows a template” and is devoid of “organic, tailor-made solutions”. The country gets a lifeline and growth returns, albeit for a short number of years. Lather, rinse, repeat.

When a member of the audience asked him if he thought the IMF’s prescriptions for reforms were “Draconian,” Mr Masud said that was exactly what the country needed to get out of the boom-bust cycle.

He criticised the overemphasis on monetary policy, saying that its status in the economic debate should be peripheral. Incentives through fiscal policy determine the direction of the economy, not monetary policy.

However, he later identified high-interest rates as a significant contributor to inflation. Borrowings make up for a little over one-third of deposits. Increasing the interest rate punishes a smaller number of people as government borrowing is agnostic to interest rates. The debt burden increases, the fiscal hole becomes deeper and note-printing creates further inflation, he said, while making the case for maintaining negative interest rates.

In a bold statement, Mr Masud criticised the design of the Temporary Economic Refinance Facility (TERF), a concessionary loan sche­me for businesses introduced during Covid-19. Banks extended almost Rs436 billion in subsidised loans within a year and made considerable profits, thanks to government support.

“The scheme should’ve been confined to the export sector only,” he said, implying that incentivising industrial expansion in consumption-oriented sectors wasn’t a sound strategy.

As for privatisation, Mr Masud said making regulatory bodies for banking, corporate, power, oil and gas and revenue segments must precede any transaction. In an implicit reference to the privatisation of K-Electric Ltd, he warned against handing over a public utility to a private equity firm that looked for an exit after turning a quick buck.

Published in Dawn, January 21, 2023


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