Recent Increase in Interest Rate by State Bank of Pakistan on Nov 12, 2008

Several things are happening in the government whether they are done from Politicians, Senate, Governor State Bank or Bureaucrats. I was reading the news of 2-percent interest rate increase (13 to 15 percent), which was definitely a difficult decision and I was thinking that SBP should have done it before that.
However, I was thinking that our so called intellectuals are always ready to criticize the economic policies. By intellectuals I do not mean professional economists but those people who always appear in the TV talk shows and take calls of economists.
As written in one of the newspaper that according to bankers and business leaders it is done in response to the preconditions of IMF. This might show a negative image of government but if we look in other way that Government deliberately delayed increase in interest rate in view that IMF will have precondition and they’ll again ask us to increase interest rate.
Now we’ll come to another point. A TV talk show criticized the autonomy of SBP without knowing the background of the issue of autonomy of Central Bank which was started in 1983. The core objective is to control inflation at the minimum possible level. Autonomy to the Central Bank implies that the Governor’s primary objective is to control inflation irrespective of what is going on with the other variables including unemployment, GDP growth etc. Moreover, it is also important that the Governor should be conservative central banker who hates inflation.
In another article in the newspaper it is rightly mentioned that lawmakers criticized the government for bypassing parliament in accepting IMF conditionalties. It would have been nice if we decide these decisions in the parliament and senate and tell them the need or no need of loans either by IMF or other international funds and foreign countries. In this way we’ll build a proper system and we’ll educate our parliamentarians about the economic system as well. Another plus point of this system would be transparency if the loan taken and spending will be evaluated in the Senate and Parliament.
Finally, I was really surprised on the statements by several senators who, I guess, should know that point of autonomy. It is quite possible that this government would want to appoint their own Governor instead of Dr Shamshad as her first term is about to complete.
It is important to mention here that decrease in interest rate increase money supply which directly affects inflation in the long run. This long run could be one and half years to two years. Right now our overall average inflation is too high and this is mainly due to the policies of last government and we cannot ignore the fact that it could be due to interest rate decline two years ago. Increase in interest rate will not affect inflation instantly but it might take inflation one year to come down. Dr Shamshad did the right thing by increasing interest rate, though I believe that it should be done at least 6 months ago, considering inflation expectations.

Earthquake in Pakistan

Dear folks

Pakistan is hit by a earthquake of 6.5 magnitude. The death toll has risen to 236 whereas 391 people were injured. The toll is expected to climb further. Pakistan army, FC, government, political parties and charity organizations are carrying out rescue operations in quake-hit areas. we appeal to you to extend your hand to the affectees in Pakistan.

There are several ways to help them one way to help them is in monetary terms and Zakat Foundation has set up a field office to distribute food packages and packages of blankets and warm clothes to these desperate people. Please make a donation to enable the Zakat Foundation to help the suffering people of Pakistan.

• Food Package Items Quantity Unit Cost
• Flour 10 kg $10.00
• Rice 5 kg $8.00
• Cooking Oil/Ghee 1 liter $2.00
• Sugar 2 kg $1.00
• Chana 2 kg $1.50
• Tea .5 kg $1.00
• TOTAL FOOD PACKAGE COST $23.50
• Your donation of $2,500 will provide Food Packages for 100 needy families.
• Your donation of $1,250 will provide Food Packages for 50 needy families.
• Your donation of $625 will provide Food Packages for 25 needy families.
• Your donation of $250 will provide Food Packages for 10 needy families.
• Your donation of $100 will provide Food Packages for 4 needy families.

You can donate at http://www.thezakat.org/orhttp://www.erra.gov.pk/WebForms/NewsDetails.aspx?id=320

For further information email me at m.alikemal@gmail.com

Cheers

MAK

Recent Depreciation in Exchange Rate: Its Implications

In few weeks Rs/$ exchange rate has shot up to above Rs.69/$ from Rs.62/$, which has some serious implications. Though people might say that these are only short term but as argued by Eichner (1979) that problems in short periods give rise to all the serious problems of the economy thus we cannot ignore the implications which could be very serious in the long run, e.g., with a high debt in dollars, increase in exchange rate means our debt in rupee terms has increased as well.
Increase in exchange rate directly affects prices through increase in prices of imported products, which may include food products. Indirectly it affects through increase in the bill (in Rs.) for oil. Prices of oil are creping up to $127/barrel, which is increasing cost of production and depreciation in exchange rate creates a double impact on the cost of production. Increase in cost of production thus increases the domestic prices. However, how much it will increase prices is a major question.
Increase in cost of production will decrease profitability and investment, which directly affects GDP. Decrease in investment affects employment generation as well, which decrease the wage rate because the unemployment will be involuntary.
Moreover, increase in prices lead to decrease in real wages, and decrease in the welfare level of the people. Decrease in purchasing power leads to decrease in consumption, which has the major share in GDP.
On the other hand, it is good to let exchange rate float in the market which was overvalued for the last three years at least. Because foreign exchange intervention in the open market has its on drawbacks. Theoretically, free float removes the imbalances in balance of payment but it can only be done if there are no market discrepancies but in a country like Pakistan we need to think it twice whether it is true or not given the current circumstances. There are certain other advantages of floating exchange rate, e.g., we can use monetary policy effectively, we do not need to change our trade policy very often etc.
However we need to think whether there is a need to stabilize exchange rate at some par value or within some range or let it float wherever it goes. Does stability in exchange rate in Pakistan has fruitful affects on economy or we need to know some threshold level of stability in exchange rate. In the presence of supply shock, e.g. oil price shock, can we keep exchange rate at some par value or within some range. Above all, Is there any pass – through effect of exchange rate on prices because Hyder and Shah (2004) concluded that there is a moderate effect of exchange rate on CPI but stronger in case of WPI.

Comments are always welcome

References

Eichner, A. S. (1979), “A Guide to Post Keynesian Economics”, Edited by A. S. Eichner, M. E. Sharper, INC, New York
Hyder, Z. and S. Shah (2004), “Exchange Rate Pass – Through to Domestic Prices in Pakistan, Working Paper #5, State Bank of Pakistan.

Democracy or no Democracy: Problems in Pakistan

This answer is in reponse to the post of Akash Jai at Facebook http://www.facebook.com/topic.php?uid=19139865256&topic=3530

Commetns are welcome

Akash's post post reveals different problems which can be eliminated just through democracy. He is very right that we are fighting for out independence after getting indepence in 1947. He mentioned Think Tanks. As far my knowledge is concerned there are many think tanks working in Pakistan and working in their own capacity and I'll be rhetoric here that the policymakers do not listen to those think tanks. Even if they listen their policies are mostly based on their self interest. We, the people of Pakistan, vote the candidates that they'll represent us in the National Assembly but it is quite skeptical that in most of the villages people vote candidate who help those people in different problems or with fear. Feudals are holding most of the things in their hands. So called chaudaries, Waderas, Sardards and Khans are manipulating the things in their favour asking people to vote for certain candidate.Ayres writings are very optimistic about democracy... According to him Democracy is the best way to convince and teach people where they have lack of knowledge but in a country like Pakistan people do not want to listen to what others say. Poverty, Justice and Illiteracy are the three main problems in Pakistan which we need to point out. These three problems can be abolished by making policies in right direction and there should be continuity and consistency in policies.

PROPERTY RIGHTS AND CORRUPTION IN PAKISTAN

Property rights are the core of economic development. Hernando Desoto argues that capitalism in America and Japan is successful because they have a good system of property rights, thus property rights are essential for the people to believe in the market system and capitalism cannot be successful without having proper property rights system in the country. Protection of property against expropriation is one important yardstick against which foreign investors assess the risk of investment. Thus we should have better system of property rights with lesser corruption to increase investment and achieve ten percent GDP growth rate[1].
Secured property rights reduce the insecurity of land. It also reduces the workload of the courts to settle disputes and credit availability to small farmers is easier due to property ownership. Moreover, it generates tax revenues and prevents cost and time overruns in development projects involving land acquisition. Thus property rights are inverse transaction cost and increase efficiency.
Pakistan’s property rights system has several anomalies such as benami transactions and general power of attorney. There are several loopholes in the system through which big landlords with the help of authority personals avoid/evade taxes and create a scenario where the third (any other) party remains deprived off using the land.
Corruption of authorities is an undeniable fact. Several cases of corruption are reported in Foqia Khan’s paper on Property right in Pakistan in the Lahore Development Authority (LDA), which is the main registration authority in Lahore. Authority personals ask for bribe to issue allotment letter for an already purchased plot, accessing a file, giving NOC etc.
Designing property rights is the most concerned thing because we need to take care of customs and social norms in Pakistan in designing the formal rules otherwise enforcement would be very difficult। Enforcement is the most important element after the rules have been made. The enforcement should be done by third party who is neutral and acceptable to both the parties (buyers and sellers).

Several problems including registration of title, non provision of legal successors in the records, oral declaration of gifts, under the Islamic law, and inherited land, petwari system, khewat based complicated system, and benami transactions.

Designing property rights is the most important step. One need to see at the increase in transaction cost, which can be financed through increase in revenues and setting up some funds for it[2]। Douglas C North argues that to get better outcomes we need to build formal laws based on cultural and social norms (informal constraints) and enforcement characteristics। Thus if people need to learn a totally different system then this might be the major informal constraint. Thus, it should be designed in such a way that the system would be formal, procedure remains the same and there should have third party enforcement which is neutral and acceptable to both parties. Third party enforcement in informal way will definitely reduce the transaction cost in the short run but in the long run in case of disputes the transaction cost will rise. On the other hand, doing it informally will reduce the potential revenues which a government can get otherwise. Thus formal third party enforcement is better as an enforcement agency.

Following are some of the points which can improve the property rights system in Pakistan. First ten points are take from PIDE Policy View Point Number 3.
1. Removal of obsolete and dysfunctional systems managed by Patwaris, Tehsildars, Tapedars, and Mukhtiarkars.
2. Set up a system of guaranteeing title to land rather than a system that merely serves the purpose of registration of documents.
3. GIS is a good way of enabling quick and efficient recording of title transfers. Though it will be expensive initially but it can be financed through increased tax revenues and setting up special fund for this purpose.
4. There is a need to establish a centralized land registry system in the form of a central registration of title of the most expensive and commercially attractive land, which should be Excise and Taxation Department (ETD) in the provincial governments.
5. There should be a requirement for compulsory registration of all documents relating to property including sale agreements, declaration of gifts, awards, transfers, and powers of attorney.
6. General Powers of Attorney should be abolished altogether [PIDE Policy Viewpoint (2007)].
7. Benami transactions should be declared unlawful [PIDE Policy Viewpoint (2007)].
8. Any suit with respect to any immovable property should be compulsorily registered with the Registrar of the High Court. The Registration Act and the Stamp Duty Act should be amended to reflect this. Moreover, by linking court records to the computer database of the Registrar, prospective buyers would be informed that the property is under litigation.
9. Simultaneously, the government could start a process of converting presumptive titles into exclusive titles after preparing draft lists that would be open to public inspection for a period of 6 months, during which objections and disputes would be settled.
10. One of the main reasons for the long delays in settling title disputes in the courts of law is the system of multiple appeals and revisions even in the case of a small property dispute. This system must be replaced by one in which a party in a civil claim does not have a right of more than one appeal. The final court of appeal should be the High Court, and not the Supreme Court, since property is a provincial subject.
11. Torrens system of land titling is a parcel based system, which is followed in the rural areas and is very successful in Australia[3]. Following this system people may not need to know entirely new system, which helps in reducing the transaction cost initially.
12. One of the main problems identified in Section III was that main emphasis of the registration process is on the identification of parties instead of identification of property. Thus an authority needs to check the existence of property before getting sign the contract between the parties and should not put ask the party to check the authenticity of the existence of property. This evolves the issue of enforcement which should be formal system and done by the registration authority who are registering the titles.
13.The enforcement authority should endure the legality of transaction, actual price of the property and buyer should pay the total amount to the seller as well as revenues to the revenue authority.

Third party enforcement is a better idea for having good property rights law but pertaining to current system of development authorities or revenue boards it is extremely unlikely that it is going to happen on fair basis. Fair role of enforcement authority, i.e., they should treat everyone equally and in a justified way. Moreover, we need to change our habits and role of individual behavior is very important for it. Unless enforcement authority does not do their work with honesty and sincerity, people will not believe in the system and the mindset of the people will not be changed. On the other hand if the individual behavior (mindset) and habits are changed that each individual do not bribe the authorities to have their work done, then the corruption will definitely decrease. Some authors find that (1) it may be optimal to allow some corruption and not enforce property rights fully; (2) less developed economies may choose lower levels of property right enforcement and more corruption; and (3) there may exist a 'free-lunch' such that over a certain range it is possible simultaneously to reduce corruption, increase investment, and achieve a better allocation of talent

Titling and registration of property rights in a formal way, coherent with informal constraints, would definitely increase corruption in short run, i.e., in the period of transition. But in the long run when the system is setup we can hope that the extent of corruption will decrease. Most important, if the punishment and enforcement of punishment for taking and giving bribe is very strong then people and authorities would fear of punishment and corruption will be reduced. This would change the habits and behavior of the people.

[1] This issue was discussed, among other issues, in the PIDE-LUMS seminar on “Law and Economics” in June 2006

[2] PIDE Policy Viewpoint (2007) available at www.pide.org.pk.

[3] Foqia Khan’s Paper on Taxonomy and Immovable Property Right in Pakistan.