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February 15, 2019

Where is the money?


February 15, 2019

For starts, we have depreciated the overvalued rupee to encourage exports and limit imports. That’s an apprentice approach to control the current account deficit.

The only trouble is that there is little to export. Somehow the industry isn’t yet feeling buoyant enough to resurge. With time it may get back its confidence. Exports thus have gone above only marginally and the annual figure in best estimates could be around $24 billion in comparison to the around $20 billion that it had dwindled down to. The most significant effect is in imports, though, which are down 10 percent reducing the trade deficit to $19 billion only.

That may slow the leakage of hard money but doesn’t necessarily of itself translate into increased productive capacity. The reserves may look marginally better, stabilising the rupee a bit, making the short-to-mid term outlook seem a little more stable, which may then encourage the local investor. This is a long-winded benefit.

The flip side is that reduced imports indicate depressed demand. That is a sign of a sluggish economy. Sixty percent of the imports are meant to spur economy and production with materials used as critical inputs and raw material. Their restricted inflow translates into low production, restricted job market and reduced exportable surplus. These then regress an economy. Depressed demand results in depressed supply, which shrinks the economy. Clearly, no one will invest in a slowing economy which may then grind to a halt.

The discount rate has been hiked considerably to ward inflation off – a spin-off from devaluing the rupee; by some counts we are already in the double-digit margin. That, however, increases the cost of money. Those who were seeking to finance their businesses now stand deterred and those who could have spent on the economy are prone to saving money. As in all of economics if there is a good side to a measure, there is a bad side to it too. The money that the banks should have been loaning continues to reside in the bank or at least doesn’t go in private hands who could invest to produce jobs – because of its enhanced cost. The economy thus either stagnates or slows further down.

Controlling inflation through higher discount rates thus becomes counterproductive. High inflation and lower growth create stagflation. No growth means no jobs. Money stagnant in the banks is money lost to the economy. High discount rates mean money remains ensconced in the banks. Control of inflation in an economy looking to grow must come from increasing supply than cutting demand. That helps production and produces jobs.

There are reports that loan off-take for agriculture has improved which indicates better loaning terms for agriculturists and may mean better agricultural productivity in due course. The affiliated industry will benefit too when support is offered in targeted areas. Otherwise, the only other buyer of money from the banks remains the government which adds to the debt basket and temporarily improves the buoyancy but again doesn’t translate into anything productive for the economy except for the long-winded route of an expected gain under a government able to keep its head above the water. Government bonds are one such vehicle to keep the government supplied in the short-to-medium term, but without any productive benefit. Money in government hands is money lost to the market and the economy.

Where is the money then, outside of the government treasury? Those who earn from trade keep it under wraps for fear of tax. Tax deters money. Those few who indulge in stocks build their stocks on the fly and lose it on the fly. The stock exchange is in recovery but the losses were huge and many of the portfolio investors chose to exit. The sentiment will take time to recover and that might bring the investor and the money back. Gains out of stocks then may find some permanent presence in the substantive economy if indeed the windfalls are huge. Equally, the exporters are loathe to bring their money back from foreign accounts till they can be assured of its safety and of a tax regime which isn’t fickle and speculative. Money abhors uncertainty.

Money in big numbers is also stuck in what to-date has been this economy’s biggest spinner – real estate and property. For the moment, this money is laying silent in wait for better times as it also hides from the taxman. The PML-N government created the filer-non-filer distinction to goad money out into other sectors of economy while uncovering and bringing suspected black-money under regulation. This has brought the entire sector to a stand-still while significantly slowing the economy.

Real-estate’s traditional certainty of a handsome return continues to give reason to the investor to hedge on keeping his money locked in. On the sly side, the assumption is that the PML-N, through such distinction, meant to considerably slow down the sector for various reasons. Money stuck in property and not spinning is money stagnated and lost to the economy even as the economy struggles to keep buoyant.

Money in the bank or stuck in stagnant sectors or in foreign accounts is Pakistan’s foremost bane. It is understandable that the government needs revenues to sustain itself and the state but money stuck is money lost and not available to increase revenues. Unless money multiplies, growth occurs and an economy is vibrant, that only will give cause for more returns to the exchequer.

Rather than scare people into submission to pay tax, it will help to gradually encourage them in the tax-net. Incentives, ease of payment and a friendlier regime will help. All, even those with zero taxable income, must file their returns. That will come about if the process is simple enough for the common person to manage. It involves a change of mind-set and attitude which will only materialise over time. Undue scrutiny and ill-thought distinction between the filers and non-filers must end to free both money and minds to begin to become a part of the process. Money in rotation is what drives growth adding to revenues, not money hidden away in stagnant sectors.

We need to free business and the economy, which includes sectors like real-estate which have underpinned growth to-date. The only need is to bring it under some regulatory mechanism; denying people the right to buy cars and property is regressive. Rather than depress demand, supply needs to increase. We must let the economy happen and not stall it with over-regulation. Those making money will spin it off into other sectors and enable wider growth. The tax-base will widen when there are more avenues of tapping it. The need is to unlock the money.

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