Tuesday, 15 August 2017

Finance and a donor-distracted SBP Nadeem Ul Haque



In 2008 financial overzealousness led the global economy over a precipice but it did not kill the romance of finance. In particular donors love finance and love to offer financial inclusion as a panacea for all societal ills.

DFID and the IFC have made the State Bank of Pakistan (SBP) run programs for financial inclusion in exchange for loans for more than a decade. SBP mission expanded into development and it opened up departments on housing, small and medium business and microfinance. Meanwhile, the IMF was pushing for independence for SBP with a sharp focus on monetary policy. 

The country’s development body, The Planning commission has been rendered a mere project office because donors have full freedom to do policy everywhere.

SBP engaged in mission creep could not even design its own financial inclusionprogram; it needed Oxford Policy Management, a UK based consulting firm, to do the design.

Many million dollars later, SBP is pushing financial programs for these SMEs, housing and microfinance with some form of subsidy or guarantee. Received wisdom in this area is that the supervisor of the banking system should not be involved in any way in either directing credit or offering subsidies or guarantees. Monetary-Policy making can be conflicted if the SBP gets involved in development policy. 

Has the SBP done a sterling job in its primary mission—managing inflation and the exchange rate? I think the consensus would be “NO!” SBP presided on the at least 2 crises in recent memory and managed them badly. In 1998, they had let the foreign exchange deposits grow to about 10 times reserves and could only exit with a default.

In the early 2000s they had held on to a policy of exchange rate over- valuation for about 7 years with widening inflation differentials.  Eventually the bubble burst with an exchange rate crisis when the rate depreciated by about 40% in a matter of weeks. In other words, policy created room for an ‘exchange rate attack.”

Perhaps focused on development, SBP has always been wrong on exchange rate. SBP has always erred on the side of keeping the exchange rate over valued i.e., the dollar is cheaper that it should be. 

Much research and evidence shows that a developing country must keep the exchange rate undervalued i.e., make the dollar more expensive than the fundamentals would suggest. Most glaring example of that recently has been China.

(But before people think I am advocating a devaluation. No! it is a question of managing a policy that will allow the correct exchange rate to emerge just like the temperature and the RPM of a finely balanced machine. Fixing the rate is not a good policy. This requires skill and research.)

Quite possibly, SBP focused on its primary task might have managed exchange rate and monetary policy better. But now more than half the bank is doing development policy in probably a turf battle with the Planning commission. Remember, this has happened through the candy of money offered by donors. 

But now our distracted SBP has once again over-valued our exchange rate to decimate our export sector.

Many studies (World Bank Doing business) have shown that investment is largely constrained by factors such as weak property rights and contract enforcement and poor governance (registration processes, taxation and corruption) and knowledge and space constraints. A course in elementary finance suggests the pricing of such risks will preclude most investment possibilities. Still expends real resources trying to solve the problem through improving loan terms. Offering cheaper and better loans to propositions that have huge structural hurdles is unlikely to make them grow and achieve solvency.

How does this make sense and has this helped or hurt SMEs? Could DFID and IFC evaluate their little experiment and tell us how the costs of a distracted SBP square off against the non-existent benefits of this decade-long activity. Are the 100 million + USD spend here justified? Could we not have dedicated that money better to importing a few professors for our professor-less universities?

Could they also tell us if all real problems can be solved merely with clever finance? Is there no need to fix domestic institutions and governance first?

Surprisingly this project was initiated at the time of the global crisis. It seems neither the donors nor SBP learned anything from the global crisis. 

And let us not ask does EAD know anything of this? Should they have?




Friday, 11 August 2017

You can’t finance away bad policy and thinking

Reagan deregulation created a romance with finance. My generation of educated Pakistanis benefited from it greatly—even gave us a Prime Minister. The romance with finance still plays strongly in Pakistani political/administrative and intellectual class. We look to finance our way out of things. It is the easy way out and we love shortcuts.

Every government runs after money. Bureaucrats are trained to look for aid and financing above all other issues. We sing siren songs to foreign investors luring them into our quagmire unaware that they like Ulysses might come prepared.

We love clever financing schemes: diaspora bonds as if immigrants can be conned into ‘cheaper than the market’ lending. Policy circles continuously chatter about securitizing remittances, floating convertible bonds or issuing more Sakooks expecting financial magic to deliver effortless development.   

Why do we think that we can con the world with financial instruments? Do we now know that financial firms are 1000s of times better at it than our policymakers? Would our politicians and bureaucrats be able to con the conmen who conned the world in 2008?

Did IPPs not come back to haunt us? Did we not learn from the Rek o Diq fiasco that the foreign investor is no friend but a shark who will take his pound of flesh?  

The romance with finance is also fed by donors after all they have to push money. We are always told how much we need their money for infrastructure, schooling, food security, sanitation, water, environment and much more. They do have an army of analysts who have nothing better to do than write reports and blogs and preach “you need money” to our governments.

All officials know that their post retirement jobs depend on donors and their children’s careers lie with donors. So, they are captured audience to the donor mantra of “you need more finance.”

Can finance solve all problems? Let us look the use simple economics to study the example of housing.

Donors have pitched for long that the shortage of housing is because of the lack of mortgages and SBP keenly engaged in mission creep for the last 10 years to develop a mortgage market. Yet the housing stock expands through the DHAs, the bureaucratic plot development (DMG), or cooperative housing societies. The first 2 are schemes for self-dealing 101, and the last is Pakistan’s contribution to the scam literature given the number of uninvestigated scams in coops.

So, the housing stock expands in expensive sprawl-based single-family homes. Cheap flats in dense spaces where the middle class can live are severely limited because the self-dealing paradigm of land development (inherent in the DHA/DMG model) seeks to restrict density and flats.

By now our demographic situation is well known. Our labor force is increasing about 2-3 million a year and our housing needs will also grow by about a 0.5- million a year. Yet the stock seems to grow in the 1000s given the myriad planning issues. Given the huge shortage, prices are escalating rapidly. 

In most cities, the cheapest house runs over a 100,000 USD forcing most people to seek informal housing or join up in some form of informal extended family arrangement. Neither of the informal arrangements are bankable given unclear property rights and contractual arrangements.

Let us examine the proposition of getting a mortgage on a house of a 100,000 USD which is about the minimum for a house in Pakistan. Even though interest rates have come down, mortgages will still be priced at 12-15%. At 12% the payment will be about 12000 USD a year. Add a little for insurance and maintenance and not including principle we will be looking at a minimum of a 15000 USD a year all included. 

Generally, it is regarded that housing should be no more than 30% of your income. This means that the income of the family buying such a house should be about 45000 USD a year. 

Just review the state of salaries. 45000 USD or 4.8 million rupees (about 400,000 rupees a month) is a seriously high salary in Pakistan even if both spouses are working.

So even if we develop a mortgage market, are we doing it only for the rich? Why then is SBP expending so much effort and why are donors funding this effort so huge? Just bad analysis?

Another approach could be to adopt reform and increase the supply of flats as dwelling units not just single family homes. This would mean break the DHA/DMG hold on the housing market to allow more density through high-rise flat construction. Supply if it goes up sharply will bring the price of dwelling unit down.

A virtuous cycle would happen as more real estate construction invigorates the economy as well as the labor market. More jobs and more bankable properties will lead to a mortgage market. 

So, donors and SBP have it the wrong way around. Rather than increase supply they are pushing expensive mortgages on a poor population. 

Moral of the story: countries and societies grow with good policy analysis rather than fanciful finance and begging for money.


Monday, 31 July 2017

Changing myths and policies require effort for process and consultation

Raza Rumi argued recently that there are 5 myths in the Pakistani discourse that need to be put to rest. In his view these are the ‘Doctrine of Necessity,’ ‘Strategic depth,’ ‘Use of Proxies’, ‘Ummah’ and ‘China will fix all’. Raza is right. A large part of our media and intellect is discussing these myths.

I would argue that Raza’s 5 myths stem from our inability to configure proper democracy. Any democratic government with an open process of policymaking with due diligence (research and reporting through white papers and documentation), public consultation (forums with government provided information and genuine participation) and open decision-making processes (forums at all levels with proper public participation and open minutes even if with a lag), ghosts and monsters can be confronted. Simple. No decision without first, adequate public scrutiny, second documentation and consultation at all levels including the public, and finally full disclosure.

There is no democracy without these 3 steps. Democracy is not mere elections but a complete process for running government for the welfare of a a free and sovereign people.

Change is not PM whim but his leadership of a process

This is what universities and think tanks are for. And yes, the government funds them to maintain this system of scrutiny on itself.

And yes! The PM must lead the process of changing policies and myths not by hiding in foreign travel but by leading the debate in Parliament cabinet and the public domain. He must use the civil service to research and prepare policies that are discussed in the public domain and in the cabinet. His word is not a command but a direction to be examined.

The civil military divide that so haunts out thinkers (who need to read a few primers in democracy) can also be handled in this open process of consultation. And yes, the army should be consulted and not treated like a subordinate department. In fact, no department should be a subordinate department. The job of the PM is to lead a consultation and not treat all as a subordinate.

Proper democratic processes are there to make consensus and democracy is about achieving consensuses. The term Prime Minister historically means first among ministers with the right to chair the cabinet. Even the Supreme court has noted that the decision-making power lies with the cabinet and not the PM.

Let me also mention an obsession of our intellectuals: foreign policy (4 out 5 of Raza’s myths are foreign policy). Yet I find no foreign policy documents related to strategic depth and our role in the Ummah put out by the government. Where are the discussions on this? Where are the speeches and thoughts on this? Not mere pouting by children and leaks like in Dawn leaks.

We all hear of Nawaz Sharif wanting better ties with India but has anyone seen a government document defining the possibilities for the new relationship? Was that ever taken up in the cabinet? Was that ever discussed in the National Security Council? Can we see the minutes? Why does the PM and the FM not give us a white paper.

Contrary to popular intellectual opinion, PM is not elected to rule. Everything that he wants cannot be policy. The system is operating in perpetuity and should. Each ruler has no right to stop the work that was begun by the preceding government and change all polices inherited. The election only gives them the right to alter policy directions after considerable consultation and due process.

Whimsical government ended with the renaissance. Now we have continuity in policy which is tweaked and reformed through clear due process which our democrats hate.

Don’t derail the system but do let us talk of reform

While Raza talk of myths, let us also talk of the major omission--what we don’t discuss.

All discussion of reform is stifled by the intellectual/senior analyst class by yelling ‘don’t derail the system.’ Any talk of reform is thought to be anti-democracy.

The expectation that somehow good democracy would happen after dynasties have run their course is expensive. Several generations will lose many opportunities before this happens. And as we have seen these politicians will do all in their power to strengthen their undemocratic system. They neither have the learning nor the statesmanship to seek better democracy. We have seen they will further foul up the system to make room for their family democracy. Will they allow reform to make true democracy happen?

We must not only talk of reform but agitate for it shout for it if we want a serious democracy that will save our state and society. Raise your voice for reform so that they are forced to change this system.

A large number of issues must be discussed when it comes to reform. Here is a sampling.

Why don’t we experiment with elections (proportional, ranked choice, multi round) that will produce better results?
Why don’t we have term limits?
Why don’t we rule out families offering too many candidates?
Why don’t we define parties better?
Why don’t we totally separate the election commission from the executive?
Should independent local governments not exist? With different election cycles?
Should we not have more equal sized provinces for a better democracy?
Why don’t we ban appointments for judges after retirement?
Why is the civil service not independent? Why is the civil service not reformed for professionalization with open entry?
Should there be an open transparent process to appoint people to key positions and taken out of the hands of the PM.
The PM should not have the power to transfer anybody. That is not part of representation.
There should be limits on the PMs ability to change budgets, engage in arbitrary expenditures, and give plots, perks and benefits to favorites.
We must ensure due process is followed.
Why don’t we make parliamentary attendance compulsory?
Why is cabinet meeting not made compulsory?
Why are minutes of most meetings not made available even if it is with a delay?
Changes in policy must be clearly planned, investigated and consulted.
Projects must be whetted, investigated and made public.
Why don’t we set up watchdogs like the CBO?

The conversation must be on change to push politicians

The family democrats with arbitrary power love the conversation that protects them from change. Should we keep the conversation on foreign policy and keep blaming the army to let them consolidate their arbitrary, lazy and wasteful rule? This is folly.

Reform will not happen if we don’t push them to make it.  It is all right to wish for democracy but then let us get proper democracy and not some deformed variety that sneaks in dynasties from the back door to give them excessive arbitrary power without checks and balances or due process.

A reform discussion does not hurt democracy. Instead it nurtures it. It is the bad kind of reform that these politicians have done to consolidate arbitrary power that destabilizes the system. Let us not blame ghosts and monsters for this; our politicians repeatedly want to kill checks and balances and due process for personal benefits.

The system must be reformed for us to get a better crop of politicians who would want to develop democracy and truly represent people and not their dynasties. And no, the system is not derailed by talk of reform or a reform movement. On the contrary, the current trend to strengthens elected dynasties is stifling democracy.

And remember democracy is not just a bad election. It has to be framed to allow elections to deliver good government responsive to the needs to people.







Saturday, 29 July 2017

Really! Who does need a prime minister? another one by Amer Durrani

In fact, do we even need a cabinet? Or, an assembly? Note that I am not saying, if we need a government. Coming back to these “political folk”! All they seem to be investing their nights and days in, is their own survival. Not in the survival of Pakistan. That be damned! Interesting how pressing matters and decisions go on a back burner. One day we need to have decisions yesterday and the next day we can wait for days. Politicians, well almost all of them, seem to be engaged in ‘Sisyphusian’ battle of daily toil—or even worst, actually believing that their toils are genuine and that this is the last roll up the hill! I think Anatol Lieven needs to supersede “Pakistan: a hard country” with “Pakistan: a baffling country”. It runs on its own. A country that is running on prayers of a few, and sacrifices of the dead. It is, definitely, not running due to this bunch of thugs—sorry, politicians! “Sadiq” and “Amin”! Come on who coined this? We, if we are an Islamic thought, are supposed to be lead by those who lead us by the Quran! Not by those who are judged on some words which have a million interpretations. Thus, the confusion, my countryfolks. Thus, the conundrum. Bad Ass India and RSS Modi. Flailing and wailing baby Ghani! Taliban and ISIS. Internecine sectarian and ethnic warfare. Dying Kashmir. The looming Trump Tower. Drying country, dying exports, waning forex reserves, raping punchaiyats, fleeing elites. No water. No energy. No anything. What the hell! The headlines still scream politics at you. I understand media—they need ratings. I understand politicians—they are thugs! What I don’t understand is us, the people. Why do we fall for this “hook line and sinker” every time? Don’t give me the Karl Marx version. Just tell me, who needs a prime minister? For, I just looked around, and damn! What a beautiful country! What a brave common folk, I see around, struggling, moving and shaking Pakistan. Who needs a prime minister.

Wednesday, 26 July 2017

Changing myths and policies require effort for process and consultation

Raza Rumi argued recently that there are 5 myths in the Pakistani discourse that need to be put to rest. In his view these are the ‘Doctrine of Necessity,’ ‘Strategic depth,’ ‘Use of Proxies’, ‘Ummah’ and ‘China will fix all’. Raza is right. A large part of our media and intellect is discussing these myths. 

I would argue that Raza’s 5 myths stem from our inability to configure proper democracy. Any democratic government with an open process of policymaking with due diligence (research and reporting through white papers and documentation), public consultation (forums with government provided information and genuine participation) and open decision-making processes (forums at all levels with proper public participation and open minutes even if with a lag), ghosts and monsters can be confronted. Simple. No decision without first, adequate public scrutiny, second documentation and consultation at all levels including the public, and finally full disclosure.

There is no democracy without these 3 steps. Democracy is not mere elections but a complete process for running government for the welfare of a a free and sovereign people.

Change is not PM whim but his leadership of a process

This is what universities and think tanks are for. And yes, the government funds them to maintain this system of scrutiny on itself.

And yes! The PM must lead the process of changing policies and myths not by hiding in foreign travel but by leading the debate in Parliament cabinet and the public domain. He must use the civil service to research and prepare policies that are discussed in the public domain and in the cabinet. His word is not a command but a direction to be examined.

The civil military divide that so haunts out thinkers (who need to read a few primers in democracy) can also be handled in this open process of consultation. And yes, the army should be consulted and not treated like a subordinate department. In fact, no department should be a subordinate department. The job of the PM is to lead a consultation and not treat all as a subordinate.

Proper democratic processes are there to make consensus and democracy is about achieving consensuses. The term Prime Minister historically means first among ministers with the right to chair the cabinet. Even the Supreme court has noted that the decision-making power lies with the cabinet and not the PM.

Let me also mention an obsession of our intellectuals: foreign policy (4 out 5 of Raza’s myths are foreign policy). Yet I find no foreign policy documents related to strategic depth and our role in the Ummah put out by the government. Where are the discussions on this? Where are the speeches and thoughts on this? Not mere pouting by children and leaks like in Dawn leaks.

We all hear of Nawaz Sharif wanting better ties with India but has anyone seen a government document defining the possibilities for the new relationship? Was that ever taken up in the cabinet? Was that ever discussed in the National Security Council? Can we see the minutes? Why does the PM and the FM not give us a white paper.

Contrary to popular intellectual opinion, PM is not elected to rule. Everything that he wants cannot be policy. The system is operating in perpetuity and should. Each ruler has no right to stop the work that was begun by the preceding government and change all polices inherited. The election only gives them the right to alter policy directions after considerable consultation and due process. 

Whimsical government ended with the renaissance. Now we have continuity in policy which is tweaked and reformed through clear due process which our democrats hate.

Don’t derail the system but do let us talk of reform

While Raza talk of myths, let us also talk of the major omission--what we don’t discuss.

All discussion of reform is stifled by the intellectual/senior analyst class by yelling ‘don’t derail the system.’ Any talk of reform is thought to be anti-democracy. 

The expectation that somehow good democracy would happen after dynasties have run their course is expensive. Several generations will lose many opportunities before this happens. And as we have seen these politicians will do all in their power to strengthen their undemocratic system. They neither have the learning nor the statesmanship to seek better democracy. We have seen they will further foul up the system to make room for their family democracy. Will they allow reform to make true democracy happen?

We must not only talk of reform but agitate for it shout for it if we want a serious democracy that will save our state and society. Raise your voice for reform so that they are forced to change this system.

A large number of issues must be discussed when it comes to reform. Here is a sampling.

Why don’t we experiment with elections (proportional, ranked choice, multi round) that will produce better results?
Why don’t we have term limits?
Why don’t we rule out families offering too many candidates?
Why don’t we define parties better?
Why don’t we totally separate the election commission from the executive?
Should independent local governments not exist? With different election cycles?
Should we not have more equal sized provinces for a better democracy?
Why don’t we ban appointments for judges after retirement?
Why is the civil service not independent? Why is the civil service not reformed for professionalization with open entry?
Should there be an open transparent process to appoint people to key positions and taken out of the hands of the PM.
The PM should not have the power to transfer anybody. That is not part of representation.
There should be limits on the PMs ability to change budgets, engage in arbitrary expenditures, and give plots, perks and benefits to favorites.
We must ensure due process is followed.
Why don’t we make parliamentary attendance compulsory?
Why is cabinet meeting not made compulsory?
Why are minutes of most meetings not made available even if it is with a delay?
Changes in policy must be clearly planned, investigated and consulted.
Projects must be whetted, investigated and made public.
Why don’t we set up watchdogs like the CBO?

The conversation must be on change to push politicians

The family democrats with arbitrary power love the conversation that protects them from change. Should we keep the conversation on foreign policy and keep blaming the army to let them consolidate their arbitrary, lazy and wasteful rule? This is folly. 

Reform will not happen if we don’t push them to make it.  It is all right to wish for democracy but then let us get proper democracy and not some deformed variety that sneaks in dynasties from the back door to give them excessive arbitrary power without checks and balances or due process.

A reform discussion does not hurt democracy. Instead it nurtures it. It is the bad kind of reform that these politicians have done to consolidate arbitrary power that destabilizes the system. Let us not blame ghosts and monsters for this; our politicians repeatedly want to kill checks and balances and due process for personal benefits.

The system must be reformed for us to get a better crop of politicians who would want to develop democracy and truly represent people and not their dynasties. And no, the system is not derailed by talk of reform or a reform movement. On the contrary, the current trend to strengthens elected dynasties is stifling democracy.

And remember democracy is not just a bad election. It has to be framed to allow elections to deliver good government responsive to the needs to people.