Post by ukipa on Oct 17, 2011 17:55:15 GMT 4
$200 million capital flight a month
Farrukh Saleem
Monday, October 17, 2011
ISLAMABAD: The State Bank of Pakistan (SBP) has now begun playing politics with an economy that is already under siege from every direction. First, SBP’s recent cut in its key policy rate by a gigantic 150 basis point (1.5 percent) is more political than anything else. Second, SBP’s repetitive intervention into the foreign exchange market to artificially prop up the value of the rupee has more to do with politics than anything else.
The cut in the discount rate is bound to induce capital flight. And, SBP’s intervention into the foreign exchange market is like throwing away dollars out of our precious reserves into a bottomless pit. The two steps put together would definitely please the sitting government, albeit over the short term only. To be certain, the two steps put together will wreak havoc on the economy over the medium to long term.
To begin with, our fix reserves at $17.3 billion mean a mere six month import coverage. In fact, of the $17.3 billion, $3.6 billion are deposits of Pakistanis at commercial banks and the remaining $13.7 billion include $8 billion recently borrowed from the IMF. And now, SBP, dying to please the government, has begun playing politics with the dollars it has been entrusted with.
Pakistani wealth is fast disappearing into far-off foreign accounts. Additional capital flight means pressure on the rupee and domestic asset devaluation. Capital flight will further retard the already anemic economic growth, depress domestic investment and push Pakistan into dangerous savings, poverty and a demographic trap.
In 1992, the Bank of England tried to artificially prop the value of the pound sterling. George Soros, who became to be known as ‘the Man who broke the Bank of England’, made the Bank of England lick a £3.4 billion wound. Our SBP, just to please its political masters, is now on its way to lose a billion dollars trying to prop up the value of the rupee.
In 1994, Banco Central de Venezuela lost $12 billion savings drowning commercial banks. In 2001, Banco Central de la Republica Argentina, the Central Bank of Argentina, made similar mistakes that bankrupted Argentina.
Pakistanis are sending out at least $200 million a month every month of the year. The drivers of this capital flight are our macro-economic policies including the rate of interest, budgetary deficit and the rate of inflation.
Pakistan’s economic future depends on the independence of our central bank-goal independence and operational independence. The SBP must leave winning public opinion to the politicians or risk complete disaster-failure of the banking system, that of the economy and massive capital flight.
Farrukh Saleem
Monday, October 17, 2011
ISLAMABAD: The State Bank of Pakistan (SBP) has now begun playing politics with an economy that is already under siege from every direction. First, SBP’s recent cut in its key policy rate by a gigantic 150 basis point (1.5 percent) is more political than anything else. Second, SBP’s repetitive intervention into the foreign exchange market to artificially prop up the value of the rupee has more to do with politics than anything else.
The cut in the discount rate is bound to induce capital flight. And, SBP’s intervention into the foreign exchange market is like throwing away dollars out of our precious reserves into a bottomless pit. The two steps put together would definitely please the sitting government, albeit over the short term only. To be certain, the two steps put together will wreak havoc on the economy over the medium to long term.
To begin with, our fix reserves at $17.3 billion mean a mere six month import coverage. In fact, of the $17.3 billion, $3.6 billion are deposits of Pakistanis at commercial banks and the remaining $13.7 billion include $8 billion recently borrowed from the IMF. And now, SBP, dying to please the government, has begun playing politics with the dollars it has been entrusted with.
Pakistani wealth is fast disappearing into far-off foreign accounts. Additional capital flight means pressure on the rupee and domestic asset devaluation. Capital flight will further retard the already anemic economic growth, depress domestic investment and push Pakistan into dangerous savings, poverty and a demographic trap.
In 1992, the Bank of England tried to artificially prop the value of the pound sterling. George Soros, who became to be known as ‘the Man who broke the Bank of England’, made the Bank of England lick a £3.4 billion wound. Our SBP, just to please its political masters, is now on its way to lose a billion dollars trying to prop up the value of the rupee.
In 1994, Banco Central de Venezuela lost $12 billion savings drowning commercial banks. In 2001, Banco Central de la Republica Argentina, the Central Bank of Argentina, made similar mistakes that bankrupted Argentina.
Pakistanis are sending out at least $200 million a month every month of the year. The drivers of this capital flight are our macro-economic policies including the rate of interest, budgetary deficit and the rate of inflation.
Pakistan’s economic future depends on the independence of our central bank-goal independence and operational independence. The SBP must leave winning public opinion to the politicians or risk complete disaster-failure of the banking system, that of the economy and massive capital flight.
Attachments:
