The paradox of asset boom

By S. M. Naseem

Despite all the good news on the economy, including the surge in the stock and real estate markets, there is an air of disbelief regarding its health. Although Pakistan's economy seems to have defied the normal laws of development and has puzzled even the most analytical mind, the current paradoxical situation of an asset boom amidst growing poverty is truly bewildering.

On the one hand, there is the picture of satisfied stockbrokers, and lucky shareholders and allottees of publicly developed land, the price of which has quadrupled in the last two years.

On the other, there are those who are unemployed or have an insufficient income. They are not only unable to afford a proper roof over their heads, but are also victims of a galloping inflation being fuelled by the abnormal rise in asset prices.

The ingredients of the present economic boom are easily discernible, although their dynamics remain a mystery. There is no doubt that the government's stabilization efforts, aided by generous foreign assistance and debt relief, have created an enabling macroeconomic environment for both domestic and foreign investment over the last few years.

This favourable economic climate has been considerably bolstered by Pakistan's emergence as a major non-Nato ally and the perquisites that accompany it. This gives credibility to the claims of political stability in the present setup.

The fact that the ongoing dialogue with India, which many expected would be prematurely derailed, has survived the initial hiccups has also contributed to business confidence.

Policy makers have taken advantage of the situation to revive the floundering economy, a task that was initially carried out by lowering the interest rate and stimulating consumer expenditure through bank-led consumer financing, particularly of automobiles, consumer durables and house-building.

The spurt in the growth rate of the last couple of years has primarily been the result of stimulation of demand in these sectors where there was previously excess capacity as a result of low growth.

However, the ability to finance these expenditures through the banking sector, has not merely been the result of a low interest rate regime pursued by the central bank over the last two years, but also that of a large inflow of private funds from abroad.

Although the transfer of these funds have been conducted through banking channels since 9/11, not all have been reflected in the balance of payments statistics. Indeed, according to the latest figures, there has been a 16 per cent decline in official remittances in January 2005, compared to those in January 2004.

Anecdotal evidence suggests that a substantial chunk of private capital inflows over the last two years represents a 'reverse capital flight' - the liquidation and transfer of hard currency holdings by expatriate Pakistanis, for speculative or investment purposes. This is a result of perceived insecurity in and disenchantment with permanent residence in the West, particularly in the US.

A significant portion of the rupees generated by such inflows is likely to have found its way to the real estate sector and stock markets, igniting and refuelling the current boom. However, while the possibility of some "push" factor favouring return migration from the West is not implausible, there is as yet little evidence of a "pull" factor drawing expatriates or their assets to Pakistan, as is happening to some extent in India.

According to the State Bank's monetary policy statement for January-June 2005, there was a robust increase in the "private sector's appetite for bank credit", despite some increase in nominal (though not in real) interest rates during July-December 2004. Interest rates grew by 19.2 per cent (Rs. 244.4 billion) compared with 16.4 per cent (Rs. 155.3 billion) experienced in the corresponding period last year.

Although the State Bank report calls the distribution of credit among sectors "broad-based", it was in fact highly unbalanced. The bulk of credit (52.2 per cent or Rs. 127.5 billion) went to the manufacturing sector (of which 75 per cent went towards textiles), followed by consumer financing (15.9 per cent), commerce (11.4 per cent), services (8.3 per cent), transport, storage and communication (5.2 per cent) and agriculture (3.6 per cent). So much for the government's professed priority to the sector which provides subsistence to the majority of the poor.

Within consumer financing, most of the consumer loans were availed of for the acquisition of automobiles (Rs. 22.1 billion) followed by housing finance (Rs. 8.6 billion) and credit cards (Rs. 3.5 billion).

Apart from the credit provided by the banks, the automobile sector has also tapped an ingenious source of credit: customer advances realized in the form of cash down payments, conservatively estimated at Rs. 10 billion to Rs. 15 billion over the last two years.

With the increase in the ceiling for the housing loans to Rs. 10 million, the bank credit to the housing sector is likely to increase and refuel the real estate boom. These monetary developments are disquieting not only because inflation is already reaching double digit levels, but also from the viewpoint of the fragility of the banking system.

The lower interest environment increased the profitability of commercial enterprises and had a healthy effect on their balance sheets besides raising the prices of their stocks, especially of those enterprises that were being privatized.

The privatization commission, in an effort to expedite their sale, has set initial prices at a rather low level. This has provided an artificial boost to the stock market.

Anecdotal evidence suggests that some of the bank credit borrowed by industrial enterprises for investment in capacity expansion and modernization is being used for speculation in the stock market.

There is also a certain amount of self-reinforcing synergy between the movements in the stock and real estate markets as the short-term profits from one are recycled back to the other. Usually, the two markets move in opposite directions, but in the present paradoxical situation, they are moving in tandem.

The economic strategy adopted to fuel the present boom has been rather disingenuously crafted. While the government talks about making the poverty alleviation programme an integral part - indeed the core - of its development strategy, most of its economic policies are directed towards benefiting a small elite connected with the landed, military and industrial classes and the upper stratum of the urban middle class.

The cabinet and other governmental decision-making bodies have these interests at heart, while demonstrating general apathy towards the problems of the common man. The military, in particular, has an overarching say in the fashioning of economic policies.

What makes the situation even more deserving of criticism is the fact that the army is deeply engaged in economic activities as recently pointed out by an influential western diplomat in Islamabad much to the chagrin of our foreign office.

While the government has accepted the tenets of Washington Consensus, especially in regard to privatization, the military continues to run industrial and economic enterprises, including sugar mills, cereal processing, bakeries, cement, fertilizer, textiles, transport, banking and financial institutions, universities, oil and gas refineries, etc, besides a prominent role in the real estate sector. What is sauce for the civilian goose is obviously not sauce for the military gander.

The military's involvement in policymaking at the macro and micro levels, represents an unprecedented conflict of interest which democracies try to avoid by requiring senior members of the government to de-link themselves from their business interests before assuming positions of executive authority.

In Pakistan, the conflict of interest is not only at the individual but also at the institutional level. The trouble is that the military is its own prosecutor, judge and jury, and no independent inquiry has ever been held into the many scandals that have surrounded its activities. These activities, even if permitted, have to be transparent or subject to parliamentary surveillance as in most democracies.

The land scam in our country has reached proportions that in any transparent, democratic or just society would have called for an investigation by a high-powered independent commission or by the institution of suo moto inquiry by established institutions of accountability.

In the last two years, land prices have suddenly jumped three to four-fold in major metropolitan cities, especially Karachi, Lahore and Islamabad. No regulatory framework exists to protect the unwary real estate investor who stakes his/her lifesavings to realize the cherished dream of owning a house.

On the other hand, privileged investors belonging to various branches of armed and civil services get multiple allotments in their housing societies at concessional rates which they unload on the market after their prices have escalated beyond the reach of the middle class buyer.

In recent years, the Defence Housing Authority, which started the elite housing boom in Karachi three decades ago, has entered the real estate arena in almost all metropolitan centres.

Lately, the cabinet accorded the Defence Housing Scheme in Islamabad the status of an authority, which was solely vested in the CDA by the 1960 Ordinance establishing the new capital.

The beneficiaries of these housing schemes are predominantly the officer class of the military. There are no schemes for retired soldiers, along the lines of the GI Bills in the United States, which cater for veterans' housing and educational needs.

Neither is there any attempt to share equitably the gains of the real estate boom with the original owners, including small and marginal farmers dispossessed of their land, owing to the misuse of eminent domain. These farmers are given compensation of a few thousands per kanal while by the time that the land is developed and houses constructed the prices have skyrocketed.

Our economy is in the midst of a massive skin-deep makeover in pursuit of General Musharraf's "enlightened moderation" paradigm. Pakistan's leaders have realized that the only way they can keep themselves in saddle is by accelerating the growth rate to generate the 'feel-good' factor - just as the BJP tried to before the Indian elections about a year ago. To what extent they will succeed in this gamble, without doing irreparable damage to the economy and inflicting more misery on the poor, remains to be seen.

[Taken from: http://www.dawn.com/2005/03/28/op.htm#1]

Date/Time Page Created: 03/29/05

Date/Time Last Modified: 3/29/2005 2:30:20 PM

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