THE MULTIPLE FAILURES OF PAKISTAN’S MONETARY POLICY

STATE BANK ANNUAL REPORT 2000-2001
THE MULTIPLE FAILURES OF PAKISTAN’S MONETARY POLICY

Pakistan’s economic decline since the enforcement of the 1988 Structural Adjustment Facility Agreement with the IMF is largely attributable to the continuing and increasingly serious failure of the country’s monetary policy. Since 1988 the IMF and the World Bank have deliberately sought to create a financial crisis in Pakistan through a series of SAF/ESAF/EFF/SBA/PGRF agreements and Financial Sector Structural loans. The IMF and the World Bank have succeeded in engineering a financial crisis in Pakistan – along the now familiar East European model – by destroying our monetary policy.

The systemic dominance of the IMF over Pakistan’s financial system is now complete. This becomes tragically clear from the chapters on money and credit and the banking system in the State Bank’s Annual Report 2000 – 2001.

Throughout these chapters the State Bank evaluates the success of its monetary policy initiatives exclusively in terms of the targets set in the IMF’s Standby Agreement of Nov. 2000 and the structural and institutional changes that the IMF has mandated. Neither in these chapters nor in the chapters on growth and price trends is there any evaluation of the impact of monetary policy on the real economy – real GDP and sectoral growth, saving, investment, income and asset distribution, poverty alleviation, attainment of national self reliance, Islamization of the financial transaction networks, increased defense capability etc.

The message is clear. Pakistan is a colony of the IMF (i.e. of America). The State Bank is concerned with securing the IMF’s continuing approval. The State Bank has no concern with the impact of its policies on the welfare or sovereignty of Pakistan. It is the IMF (America) which is the true sovereign power in Pakistan, for has it not since 1993 been appointing the Governor of the State Bank and his entrounage of advisors?

This paper will (a) document our monetary policy failures (b) seek to identify the causes underlying these failures and (c) suggest an alternative strategy for dealing with the existing financial sector crisis.


I.Monetary Policy Disasters.

It is significant that the monetary orthodoxy underlying IMF perspectives is nowhere evaluated in the State Bank’s Report 2000 –2001. This orthodoxy is disintegrating as recession grips America, Europe and East Asia, controls are imposed on capital transfers in international market, currency board arrangements collapse in Argentina and the need for fiscal stimulation is relegitimized. Continued adherence to monetarist orthodoxy in the post globalization era can be suicidal. Unfortunately our monetary policy leadership is not aware of these damagers. It is clear that this leadership has little exposure to monetary theory controversies.

The Death of Credit Planning

Preserving the national financial system in an era of world recession requires the central bank’s firm control over it. As the State Bank becomes increasingly subservient to the IMF (America) it’s systemic control over the national financial system is inevitably weakened. This becomes clear from the ineffectiveness of credit planning. Every year the State Bank goes through the ritual of establishing targets for the components of monetary and credit expansion. Every year the State Bank Report shows that the actual outcomes are usually widely different from these targets. Thus the outcome for the 2000-2001 credit plan shows that:

•Net government sector retirement of credit (negative borrowing) was over 200 percent greater than the target set by the IMF (America) imposed credit plan and over 20 times greater than the target of the original SBP formulated credit plan.

•Gross budgetary borrowing was only 3.4 percent of the amount allowed by the IMF (America) imposed credit plan.

•Net budgetary retirement of credit to SBP was over 15 times greater than the target set by the original credit plan and more than 200 percent higher than the IMF(America) plan target.

•Net budgetary credit retirement to scheduled banks was only Rs. 1.4 billion as against the IMF (America) imposed target of Rs. 12.7 billion.

•Governmental sector borrowing was 23 percent lower than that targeted in the SBP original credit plan and 35 percent lower than that allowed by the IMF (America)

•Net private sector credit was 35 percent lower than that allowed by the IMF (America) credit plan.

•Other items net increased by Rs. 30 billion whereas the IMF (America) plan had expected a reduction of Rs. 2 billion and the State Bank plan expected zero growth in this item.

•Net domestic assets rose by less than 60 percent of the level allowed by the IMF / America and (useless) net foreign assets growth exceeded the IMF/America target by 31 percent.

•Total monetary assets (M2) growth was 13 percent lower than that permitted by the IMF/America and about 15 percent lower than that expected by the original State Bank credit plan.

In view of these grotesque differences it is surely farcical to speak of “credit planning”. The State Bank does not even have modest forecasting capability. What are the three research departments and the seven specialist advisors doing?

Neither the IMF (America) nor the State Bank has as yet developed an accurate understanding of the relationship between the financial sector and the real economy. The original credit plan was based on the assumption that real GDP would grow by 5 percent during 2000-2001. It had expected that a 10.5 percent rate of growth of monetary assets was sufficient to sustain this GDP growth rate. The actual GDP growth rate attained during 2000-2001 was only half the level anticipated in the original credit plan and 9 percent growth in monetary assets was required to permit GDP to grow at 2.6 percent. Should not monetary asset growth be much higher – at least 20 percent per annum – to sustain a substantial and significant increase in per capita income in Pakistan?

Impact of Contractionary Monetary Policy

The miserable growth performance of 2000-2001 is partly attributable to the vicious contractionary monetary policy pursued by the State Bank to please the IMF(America). The elements of this contractionary policy were as follows:

•Strict controls on government borrowing from the State Bank and the scheduled banks. Net government borrowing from the banking system was minus Rs.33 billion. This meant that public sector investment remained stagnant in real terms during 2000-2001 and has now fallen to 5.5 percent of GNP. The SBP acting as the IMF’s (America’s) local watchdog continuously monitors government borrowing from the banking system. This ensures that public investment growth is effectively throttled on a week by week basis.

•The SBP refused to entertain financing accommodation requests form the government forcing the government to borrow at expensive rates from the scheduled banks. In December 2000 when the State Bank had to meet NDA targets the government’s net borrowing from the State Bank fell by over Rs. 50 billion but its net borrowing form the commercial banks rose by over Rs. 40 billion. This high cost public debt was effectively substituted for low cost public debt.

•Usury rates were continuously jacked up to shore up the sagging Rupee: Cash reserve requirement rate and the discount rate were raised not only throughout the first half of 2000-2001 but also in June 2001.

•Tight monetary policy led to an increase in scheduled banks’ lending usury rates during 2000-2001 despite a fall in the average deposit usury rate. Private sector net borrowing during 2000-2001 was only Rs. 52 billion – even the IMF dictated “credit plan” had expected net private sector borrowing to equal Rs. 93.5 billion. There was virtually no net credit expansion to the policy favoured IT and small and medium scale industries. It was the petering out of the ‘ accountability’ drive and the widespread growth of rescheduling arrangements which encouraged the textile and sagar seths to return to the money market.

•Gross disbursements under the export refinance scheme also fell during 2000-2001. This was a direct consequence of the jacking up of usury rates under the EFS by linking them to T-bill rates. This is a component of the IMF’s receipts for killing off development financing in Pakistan.

Other disastrous consequences of monetary policy are:

•Non working capital loans accounted for only 7.7 percent of total private sector borrowing from the banks in 2000-2001. In 1999-2000 this share had been 8.9 percent. There is virtually no project financing in Pakistan. Since the IMF grip has tightened there are literally no new projects being undertaken by the public sector or the private sector. To pursue tight monetary policy in these circumstances tantamounts to committing national economic suicide.

•Virtually no credit was extended to the capital goods industries. Pakistan is facing a de-industrialization related technological melt down. The throttling of defense expenditure means that the capital goods sector and the technological intensive industries are being killed. Today they account for less than 5 percent of manufactured value added. The share of technology intensive exports in total export revenue is about 0.1 percent.

•The agricultural sector is also facing severe credit starvation. During 2000-2001 recoveries by ADBP exceeded gross disbursements by Rs. 23 billion. The State Bank has under IMF (America) pressure abandoned all development financing to the agricultural sector.

•Recoveries exceeded gross disbursements for the 14 DFIs by Rs. 43 billion in 2000/2001. Over the period 1999-2001 total recoveries by DFIs have exceeded disbursement by about Rs. 150 billion. This is disinvestment from the industrial and agricultural sector with a vengeance. The IMF (America) and the State Bank are deliberately killing off all long-term investment activity in Pakistan.

•The continuous compulsive pressure to build up net foreign assets in the form of liquid reserves locks up these resources in very low interest earning accounts. The rise in foreign currency holdings by the scheduled banks and the enforced foreign exchange and swap transactions of the State Bank necessitated by IMF (America) imposed NFA commitments entail a massive development loss for Pakistan.

Banking Sickness

•The underdeveloped character of the Pakistani money market is reflected in the fact that currency in circulation and demand deposits (M1) at end FY01 still accounted for 49 percent of total domestic liquidity. The increase in time deposits in the last two months of FY01 was due mainly to SBP’s injection of Rs. 20.8 billion in the market through the retirement of dollar swaps and the undertaking of fresh swaps to the amount of $126 million in the month of June. Moreover the significant increase in FCA deposits was also not investible in Rupee form since most of it was under the FE-25 scheme. Rupee deposits grew by only 6 percent in FY01: In FY00 they had grown by 8 percent. Taking account of inflation it can be shown that Rupee deposits as a proportion of real GDP have fallen in FY2001.

•Extremely tight conditions prevailed in the money market throughout FY2001. OMO absorptions exceeded injections by Rs. 26 billion in FY2001 Total amount of discounting by commercial banks doubled in FY01 compared to the previous year. The number of visits to the discount window and average amount discounted per visit also increased. There was continuous upward pressure on T-bill rates. Despite these measures the Rupee depreciated by about 19 percent during 2000-2001. Total internal debt rose by 9.6 percent during FY01. The total debt to GNP ratio now exceeds Rs. 115 percent of GNP.

•The banking sector continues to be in deep trouble. The capital adequacy ratio (extremely generously defined) despite a major injection of capital into the NCBs has declined for every group of scheduled banks during the calendar year 2000 – for the banking sector as a whole the capital adequacy ratio fell by 9 percent during 2000. The Non Performing Loan (NPL) portfolio is continuously massaged through a never ending process of payment rescheduling to conceal default. Despite this, for the banking sector as a whole the non performing loan to gross advances ratio exceeded 23 percent at end December 2000. Gross NPL advances rose from Rs. 230.8 billion at end 1999 to Rs. 236.7 billion at end 2000. The cash recovery to loan default ratio has fallen for all banks from 8.6 percent in 1997 to 8.3 percent in 2000. Thus over 90 percent of the non performing loan settlement takes the form of loan rescheduling and are essentially fictitious.

•The inefficiency of the banking sector is also reflected in expenditure ratios. For the banking sector as a whole expenditure accounts for 96 percent of income in both 2000 and 2001. Even for private and foreign banks this ratio is a high as 89 percent in both years. Salaries allowances and perks account for 23 percent of total expenditure by NCBs and for 28 percent of total expenditure by privatized banks in 2000. In 2000 the salaries to total expenditure ratio rose by 14 percent for NCBs, by 6 percent for privatized bank and by 14 percent by foreign banks.

•The NCBs continue to be the worst performers and the much trumpeted improvement in their profits during 2000 is clearly a statistical illusion. The increase in NCB profits is almostly entirely accounted for by the fact that provisioning by them against bad loans fell from 10.09 percent in 1999 to 3.6 percent, in 2000 despite the fact that the gross non performing loans to gross advances ratio for NCBs remained at 26.5 percent in 2000. Foreign banks with a non performing loan to advances ratio of 5.1 percent had a provisioning ratio of 3.4 percent (only 0.2 percent lower than NCBs) in 2000. Private Pakistani banks had a provisioning ratio of 7 percent while their NPL to advance ratio was 11 percent (less than half that of the NCBs) in 2000.

•The liquidity position of all groups of banks has deteriorated during 2000. This decline is most pronounced in the case of foreign banks where the liquid to total assets ratio has fallen by over 17 percent over 1997-2000. Banks’ risk exposure has also increased. The gap between risk sensitive liabilities and assets has widened from Rs. 199 billion in 1997 to Rs. 255 billion in 2000.

•The overall weak position of the banks is reflected in the continuing decline of the deposits to GDP ratio which has fallen by ‘almost 10 percent during 1997-2000. Foreign banks account for only 14 percent of total bank deposits and their share of bank advances is even lower. Advances growth during 1997-2000 has been significantly in excess of deposit growth thus increasing the riskness of the foreign banks.

•Banking sector inefficiency has also increased. This is reflected in the continuing increase in the difference between deposit and lending rates which increased by 5.3 percent during 1997-2000. In calendar year 2000 average deposit usury rates fell from 5.5 percent to 5.3 percent but lending usury rates rose from 13.5 percent to 13.6 percent. Bank inefficiency is also reflected in the falling total banking assets to GDP ratio which has fallen by 5.8 percent during 1997-2000.

•It is clear that the prudential regulations and restructured bank supervision and inspection system has not succeeded in reducing bank inefficiency, increased riskness and mismanagement. During 2000 Prudential Commercial Bank and Indus Bank went bankrupt. In 2001 they were followed by the country’s leading DFI, NDFC. More bank closures and bankruptcies are on the way almost certainly for the State Bank has no detailed knowledge of the Pakistani financial system. It relies exclusively on IMF (American) and World Bank outsiders and is concerned only to please them.

Balance of Payments Illusions

•The apparent improvement of the country’s balance of payments position during 2000-2001 is largely a consequence of changes in accounting practices and short-term measures related to SBA arrangements. Thus the much trumpeted current account surplus is entirely due to the change in the accounting treatment of the Saudi Oil Facility (previously defined as a loan but now as an outright grant) and the massive increases in the outright purchases by the State Bank from the kerb markets – during FY 2001 these rose by 32 percent. The total amount under these two items exceeds Rs. 2.8 billion and if they are excluded the current account surplus (which is only $331 million) would of course vanish. The improvement in the capital account was mainly due to expanded short-term borrowing and the absence of roll over of Euro bonds, FE45 deposits and PTMA credit. The 63 percent increase in reserves recorded for 2000-2001 is also mainly due to new accounting practices which include reserves with authorized dealers as a component of total reserves. According to the old definition reserves at end FY2001 amounted to only $1.6 billion.

$4 – the Price of a Pakistani

•Pakistan received only a net inflow of $85 million from the IMF during FY 2001. Inflows of $324 million under the SBA were offset by outflow of repayments (repurchases) worth $239 million – thus IMF (America) has bought our national economic sovereignty for just $85 million. In addition we received net official assistance of $432 million mainly in the form of non project aid. Pakistan cost to imperialist? $500 million per year. A little over $3.5 per Pakistani.

•Net total foreign investment during 2000-2001 amounted to only $137 million and there was a net outflow of portfolio investment to the extent of $149 million. Exceptional financing (debt relief, postponement of roll over etc) netted us $692 million. The lesson is that selling national sovereignty earns us exceptional favours but it does not increase the long run commitment of long-term imperialist finance (public or private) to Pakistan.

Increasing Debt

•Maintaining imperialist dominance over the Pakistani economy requires maintenance of a high level of indebtedness. That is why despite all talk of public debt management (remember the Pervez Hasan Committee?) FY2001 saw the largest ever increase in Rupee denominated debt largely due to the 19 percent devaluation which accured in that year. Foreign debt now accounts for 55 percent of total public debt. The increase in the public debt to GDP ratio (up from 107 percent in 1999/2000 to 115 percent in 2000/2001) has come exclusively from the increase in external debt. As far as domestic debt is concerned we are bracing ourselves for an explosion of permanent debt with the launch of PIB which must grow experientially if it is to play its expected role of a market benchmark. Usury rates on public debt are subject to contradictory trends – rising in the case of funded debt (TB rates) and falling with respect to NSS schemes (unfunded debt.) Nevertheless total usury payments on domestic debt in 2000/2001 were still at the 1999 level.

•Usury payment on external debt rose by 12.5 percent during 2000/2001 and total external debt servicing in dollar terms rose by 11.7 percent in FY2001. Of the $3.33 billion external servicing undertaken as much as $1.71 billion (51.3 percent) is related to the servicing of short and medium term debt. It is clear that debt rescheduling leads to an increase in both the volume of debt outstanding and to the cost of servicing this debt. Moreover the debt burden continues to grow explosively due to the highly injurious free float exchange rate policy which has contributed both to accelerated depreciation and to a vicious jacking of usury (specially TB) rates during most of FY2001. There is a built in bais towards the undervaluation of the Rupee in this foreign exchange regime since as the State Bank Report 2000/2001 itself shows, while kerb rates are revaluation resistant, they respond swiftly to a depreciation (p158-159). There will be continuous pressure on external debt servicing and on interest rates in general as long as we follow the IMF (America) diktat and operate the disastrous freely floating exchange rate regime.

Credit – only for the Rich

•Perhaps the single most important cost of financial liberalization is the enormous concentration of credit it generates. Thus at end June 2001 accounts in excess of Rs. 10 million equaled only 0.9 percent of the total number of accounts in the country yet their share in the total advances of the scheduled bank was 75.8 percent. In 1999-2000 this share had been 72.8 percent. It can thus be seen that the wealthiest account holders received the highest share of credit growth from the banking sector. Almost all of these large investment account holders are defaulters and owners of non performing loans. Non performing loans will continue to grow as credit concentration increases. Abandoning market based monetary policy is necessary both for reducing credit concentration and for dealing with the problem of bad debt in the banking sector.

Who Weeps for the State Bank?

•Finally it must be stressed that the State Bank is an increasingly inefficient organization. As the Exhibit below shows the State Bank produced perhaps
==
State Bank Inefficiencies: Changes In Income and Expenditure
1999-2000, 2000-2001
Percent Change
Gross Earnings -1.8
Establishment Expenditure 197.1
Salaries etc. 10.0
Net earnings -88.2
Net Loss on foreign ex. trans. 355.8
Total income -36.4
Net profit -43.7
Source State Bank of Pakistan Annual Report 200-2001 p171
====
the worst financial performance in its history in FY2001. Establishment cost went up by a shocking 197 percent. Due to this massive increase in establishment cost there was an operating loss of Rs. 6.8 billion in 2000 – 2001 against an operating profit of Rs. 34.2 billion in 2000-2001. Retirement benefits rose by 733 percent form Rs. 480 million in 1999-2000 to Rs. 3.5 billion in 2000-2001 (SBP Report p 204). The increase in other income shown in the ‘notes to the accounts’ (note 37) is mainly a consequence of changes in accounting procedure. Provisions made for retirement benefits and bad loans of Banker’s Equity lead to a draw down of reserves by Rs. 5.6 billion.

Net loss on foreign exchange transactions went up by 355 percent and SDR charges rose by 25 percent. Both were a consequence of adopting the disastrous free float exchange rate system which led to a massive devaluation of the Rupee.

Total income declined by 36 percent, net earnings by 88 percent, net profit by 44 percent. All talk of increased efficiency through reliance on outside imperialist trained experts and professionals become a laughing matter when one is confronted with such figures.

The poor analytical quality of the State Bank’s Annual Report also illustrates a lack of professional expertise. This analytical poverty becomes glaringly evident when one compares the State Bank’s flagship publication with similar publications of Bank Milli, Iran or the Reserve Bank of India. The State Bank is yet to publish a comprehensive flow of funds matrix for the macroeconomy – the most elementary of macro management tools. The State Bank’s Annual Report is a dreary reading of statistical tables displaying little analytical insight and providing no coherent justification for its preferred policy options. Readers of the Report are expected to be true believers in the voodoo economics of Lucas and Sargant. The State Bank has no less than three separate research departments but it’s research output is presumably meant only for the IMF (America) and World Bank consultants who dominate the State Bank and the foreign bankers who dominate the commercial banking sector. Ordinary Pakistanis can of course have no access to this research for the organizational mandate of the State Bank is to consolidate the financial foundations on the basis of which Pakistan can be turned into a subservient neo colony. One must have faith in the eventual success of the IMF (American) strategy – despite the overwhelming empirical evidence to the contrary. All that the State Bank takes prude in is meeting the IMF (America) targets.


II.Explanation Monetary Policy Catastrophes

The failure of monetary policy is reflected in:

The decline in the trend GDP growth rate of almost 6.5 percent during the credit planning period to a shade over 4 percent during the financial liberalization era and to 2 percent today.

Fall of national saving to about 12 percent of GDP and investment to about 15 percent of GDP.

Continued massive devaluation of the Rupee and the consequent compulsory rise in usury rates.


There are three major reasons for this failure.

First, the new classical economic theory on which IMF type macroeconomic stabilization programs are based is not focused on the issue of economic growth. The full implications of incorporating rational expectation assumptions means of course that monetary policy initiatives are entirely irrelevant in both the short and the long run. Even in the “monetarist” version of the new classical approach where short run effectivity of monetary policy is admitted, the impact is “assigned” entirely to changes in aggregate demand. Monetary policy can only adjust to changes in aggregate supply and these changes are attributed to theoretically unfathomable “exogenous” shocks. Monetarists recommend that such adjustment should be achieved by targeting money supply but the crucial assumption on which this preference for money supply targeting is based are (a) demand for real money balances is interest inelastic (b) the demand for real balances is stable and (c) investment demand is interest elastic and overall real expenditure varies significantly over time. If these assumptions do not hold, there is no reason to expect “monetarist” money supply targeting to stabilize the macroeconomy – let alone contributing to growth. The McKinnon-Shaw-Fry revision of crude monetarism predicts that adjusting money supply to eliminate market “distortions” will jack up usury rates but since saving is interest elastic and since higher usury charges necessitate an improvement in investment efficiency higher usury rates are good for growth. On the other hand, post Keynesian monetary theorists hold that in a modern sophisticated financial system control of the money supply is impossible since there are multiple sources of money creation and a plethora of liquid assets – inability to control US money supply has often been admitted by Alam Greenspan; the chairman of the Fed.

As Kaldor pointed out in the 1980s, the Central Bank in a capitalist economy does not control the processes of money creation, it merely accommodates or adjusts the macroeconomy to the credit creation decisions of private oligopolistic banks. There is nothing in new classical or monetarist economics to lead us to expect that an increase in money supply or credit will lead to an increase in production. It has during the last twenty years led mainly to an increase in financial claims on existing output. The new classical economists argue that the actual equilibrium in the money and the real sector is necessarily the potential output equilibrium and thus monetary policy is irrelevant. This is an economic version of the Hegelian “the real is the rational” absurdity.

Post Keynesians regard this “vision” of the macroeconomy as patent nonsense. Factor (specially credit) and commodity prices are rigid because production takes place over time. The investor needs to bridge the gap between capital lay out and return from sales. Debt contracts cannot be spot but must be temporally structured. This is also true of labour contracts and hence the rigidity of wages and usury rates is a structural / institutional requirement of a capitalist economy. Factor and commodity price flexibility is pure fiction a norm to which capitalist markets cannot tend.

Post Keynesians such as Rogers (see his Money Interest and Capital CUP 1989) also stress that interest is an exogenously determined price. Interest is the price of credit. Rogers shows that credit is a commodity to which the laws of production do not apply and it can therefore have no natural price (except zero). Usury represents the credit owner’s share of profits and from the time of Sraffa’s seminal contribution we know that the struggle among capitalists determines profit (i.e. surplus) appropriation. The legitimate/natural share of finance capital in surplus cannot be theoretically determined since it does not exist.

Changes in money supply do not automatically lead to changes in usury rates. As Kaldor showed in his classic critique of monetarism usury rates fall only if the central bank so desires. There is no built in automaticity because there is no reason for the existence of a positive interest rate specially in an economy where the central bank can create credit almost costlessly and at will. A central bank such as the State Bank of Pakistan which is inexorably pushing up usury rates, must necessarily stifle growth.

Market based monetary policy focused on money supply targeting must be growth stifling in Pakistan. Recent econometric research at CBM has shown that (a) investment demand is interest inelastic (b) there is no association between output growth and usury rate changes (c) monetary assets (M2) is an endogenously determined variable. It is caused by and does not itself cause output growth.

The second reason for the failure of monetary policy is that the IMF (America) and the World Bank have made it impossible for us to deviate from monetarism. The abandonment of the credit planning system and the full-blown financial crises that has followed the introduction of market based monetary management has been engineered by the IMF (America) and World Bank. The Fund and the Bank forced us to abandon credit planning. They forced us to adopt financial liberalization. Why did they do so?

The Fund and the Bank are the agents of international capital. Their primary organizational task is to facilitate world-wide sourcing and global profit maximization by international banks and multinational corporations. They perform this role as public agents effectively representing the strategic interests of imperialism’s sole hegemonic state, America.

During the 1990s most of the OECD countries – specially Germany and Japan have been in a state of recession. The United States is now in recession and prospects for all major regions are bleak. The present recession is characterized by negative output growth, high and rising unemployment, intense oligopolistic competition, declining population growth in the West and in East Asia and a rapidly worsening pattern of income distribution (specially in the United States) which severely constrains consumption growth. Sufficient profitable investment opportunities do not exist in the West to absorb the tremendous amount of corporate and business saving that the system is generating. International capital needs therefore to move into non-metropolitan countries but it can profitably do so only if it subordinates the only source of resistance which can seriously challenge globalization – i.e. the peripheral state. International capital’s primary need is to subjugate peripheral states to America. Without this, it can never feel secure in a peripheral country such as Pakistan.

International capital has two subsidiary needs. Since it’s dominant form is finance (not industrial) capital it requires a tight monetary policy and a jacking up of usury rates. Restrictionist polices are preferred and in as much as they foster deflationary conditions they fulfill international capital’s second subsidiary need. This is the cheapening of assets in the peripheral countries. Devaluation is the preferred tool for achieving this objective.

The IMF (America) and the World Bank have been only partially successful in achieving these ends. Our military budget has fallen in real terms in the last few years but we retain our nuclear programme and the imperialist dominance over our political system is still precariously balanced and it’s termination is a probability. Most importantly, there is a thriving manufacturing and commercial informal sector outside the reach of policy liberalism from which effective resistance can be launched. It is this delicate balance of political, economic and social factors, which ensure that foreign capital remains reluctant to commit itself to Pakistan.

But there is an important success that the imperialists have achieved in the period since the first Benazir government of 1988. During 1988-2001, they have succeeded in transferring economic management in Pakistan to a group of professionals who have no commitment to Pakistan. They are permanently based in America and work for American multinationals and banks. They have been seconded to Pakistani organizations on a short term basis to implement the imperialist agenda. These quisling professionals are imperialism’s fifth columnists in Pakistani banks, government organization, research institutes and autonomous bodies. During their prolonged stay in western countries, they have adapted the shameless life style of the West and have had no contact with the thriving Islamic movements of Europe and America. They have a strong hatred and contempt for Islam and are unashamed lackeys of their imperialist masters. It is their domination of the economic policy making process, which is the third reason explaining our implementation of policy liberalization. Being narrow-minded professionals, these quislings have no understanding of the theoretical inconsistencies and methodological premises on which liberalization policies are based. They undertake policy conception, and implementation in a ham handed fashion, which ensures that it has the maximum harmful impact on Pakistan. If Pakistan is to avoid an economic crisis the power of these quislings over monetary policy making must be broken.

In brief, we have not embraced financial liberalization voluntarily. It has been imposed upon us by the imperialists who use it as a means for weakening the state, destroying the production base (specially large scale manufacturing) and cheapening Pakistani assets. We continue to adhere to these policies because the imperialists have succeeded in infiltrating their servants into our decision-making institutions in both the public and the private sector. But continued subservience to imperialism is not necessary. An alternative is available. It is specially necessary to seize this alternative in the changed circumstances following the September counter attack on America and the protracted global economic downturn which it has precipitated.


III.The Alternative

The alternative to imperialist subjugation is Islam. There is no other alternative. We reject imperialist subjugation, globalization and policy liberalization because.

Globalization and policy liberalization is a failed experiment. Policy liberalization has led to a sharp fall in world output growth – this averaged only 1.8 percent per annum during 1990-99. During 1990-99, the OECD countries grew at an annual average rate of just about 2 percent. Income distribution patterns worsened specially in America. Financial liberalization has been a disaster, while commodity production has stagnated, through out the West financial claims on existing assets have soared laying the foundation of an unavoidable crisis. Moreover, there is no international financial regulatory authority – the IMF and the BIS have no power over the international banking conglomerates. Systemic arrangements to defuse major financial crisis do not exist. Liberalizing international trade does not lead to significant efficiency gains. In Dani Rodrik’s words, this is “the dirty little secret” which trade theory seeks to conceal. Integrating into the world market has few benefits overwhelmingly outweighed by the astronomical costs of increased financial vulnerability and loss of national sovereignty.

Since the September 2001 counterattack on America the world economic outlook has worsened. All major forecasters – Merrill Lynch, Goldman Sachs, the IMF the OECD – now believe that growth will probably be negative in 2001 and negligible in 2002. Despite the symbolic launch of a new WTO round, trade volumes will fall and process protectionist barriers will rise. Restrictions are being imposed throughout the world on the movement of capital. Budget deficits are back and the days of big government are returning. We are in a post global era in which integrating with the international economy makes no economic sense for countries like Pakistan. Pakistan has received only symbolic concessions for betraying Islam. There will be no major debt write off or significant debt reprofiling. Exports will plummet. Foreign investment flows will dry up. In these circumstances we must focus on domestic demand and abandon the quest for favours from America and the IMF.

Financial liberalization exposes Pakistan to Jewish penetration. As David Ben Gurian (then Prime Minister of Israel) said in 1967 “Pakistan is our deadliest enemy. It is a fundamental aim of Zionist policy to destroy Pakistan.” Financial liberalization has allowed Jewish financial empires – including Rothschild’s family bank – to dominate Pakistan’s money and capital markets. It is not surprising that these institutions and the IMF place great emphasis on the rapid demilitarization of Pakistan despite the growing American threat in the Gulf and the rising tide of Indian brutalities in occupied Kashmir.

Most importantly policy liberalization – and financial sector liberalization in particular – is a means for destroying the Pakistani state. This is evident from the continued insistence of the Fund and the Bank on reductions in military expenditure. During fiscal 2000-2001 federal defence, expenditure fell in real term and a further fall is envisaged for 2001-2002 – in dollar terms we spend less on defence today then we did ten year ago. Debt servicing on the other hand is expected to grow continuously despite hypocritical gestures of management strategies and associated rescheduling and reprofiling exercises. Moreover policy liberalization has led to a transfer of economic sovereignty from the Government of Pakistan to foreign agencies and their agents in the financial sector who are subordinating national policy to imperialist money and capital markets.

The alternative approach to monetary policy must involve the ouster of the present financial sector leadership. IMF (America) nominees should never again be the governors of the State Bank. The person selected to fill this post must be a true patriot and a sincere Muslim. The amendments to the State Bank of Pakistan Act 1962 and the Banking Companies Ordinance 1967 introduced in 1997 should be repealed and the State Bank should be subjected to the full authority and control of the Ministry of Finance and parliament. Without this, it cannot be prevented from functioning as an agent of international capital for destroying Pakistan’s sovereignty. Fifth columnists must also forthwith be removed from top management in NCBs. This is a matter of urgency for without it Pakistan can not avoid a financial crises.

It is also necessary to accelerate the pace of introduction of the Islamic financial system and the elimination of interest from the economy. Those who regard the implementation of the 1980 recommendations of the Islamic Ideology Council as impractical should note that when these recommendations were made our total debt servicing amounted to just Rs. 109.5 billion (in 1979-80). External debt servicing amounted to only 12 percent of foreign exchange earnings in 1979-80. Servicing of domestic debt amounted to just 1.1 percent of GDP. Had the debt retirement and restructuring proposals of the Islamic Ideology Council been implemented in 1980 imperialist domination and the growth of the debt burden would have been impossible.

Other measures required for a successful monetary policy are:

The cancellation of all existing agreements with the IMF and the World Bank and Pakistan’s immediate withdrawal from GATT/WTO commitments.

Immediate discontinuation of market based monetary management and rigorous implementations of credit planning. Market based monetary policy makes the Islamization of the financial system impossible.

Immediate nationalization of all banks, DFIs and financial institutions both domestic and foreign.

Abolition of the money market and immediate institution of a system for meeting financial sector liquidity needs on the basis of the 1980 recommendations of the Islamic Ideology Council.

Imposition of strict capital controls and foreign exchange rationing

Repudiation of all external debt claims incurred since December 1988. These debts have been imposed upon us by the IMF and are its responsibility.

Repudiation of domestic debt in accordance with the 1980 recommendations of the Islamic Ideology Council.

A doubling of expenditure on defence to at least 10 percent of GDP and a strengthening of the relationship between defence spending and capital goods sector investment.

Delinking from the international system will be painful. But it is clearly not impossible. Our trade – GNP ratio is about 30 percent and shrinking. Net external resources inflow is only 10 percent of gross capital formation. Foreign direct investment is minuscule – usually less than $400 million gross on an annual basis. Portfolio investment is negative and focused on trading of existing securities and not on new issues. Project aid has also been falling. At present domestic savings finance about 90 percent of our total investment. We are not a foreign capital dependent economy. Moreover, by repudiating foreign debt the government will save about $5 billion annually almost twice, what will be lost in DFI and project aid flows. Debt restructuring and reprofiling cannot conceivably save such sums.

Countries with a much higher level of dependence have successfully de-linked from the imperialist system – Russia in 1917, Germany in 1922 and Iran in 1979. Iran has grown at an annual average rate of growth of over 6 percent during the Islamic period despite US sanctions. If the political will of the people is resolutely organized on the basis of a platform of Islamic unity Pakistan’s subordination to imperialism can be ended and her Islamic identity preserved. The Islamic movement is immensely powerful and as Khomaini said in 1979, “America can not do a damn thing”.