Our country is confronted with a myriad of problems such as deteriorating economy, high population growth, poor law and order situation, scarce energy resources, depleting water flow in rivers, poor infrastructure, low literacy rate, poor health facilities, terrorism and corruption. The weak economy poses an existential threat to Pakistan. Hence it is quintessential to explore the ways and means to correct it.

A relevant historical coincidence can be traced in Banque de France, founded by Napoleon Bonaparte, who made it independent in the year 1803. The Banque was granted monopoly over note issuance. In 1805, immediately following a naval disaster at Trafalgar and just as Napoleon was launching his latest campaign against the Austro Russian alliance, a panic among merchants of Paris precipitated a run on his infant Banque. This forced it to near liquidation as people began to withdraw money that the government needed! Napoleon became enraged at his bankers and on his return from Austria he fired his Minister of Finance. To the bank’s three man management committee he offered a choice between either prison or a fine of eighty seven million francs. They chose the fine. He then replaced the management committee of the Banque with a Governor and two Deputy Governors to be appointed by the government. He declared “The Banque does not belong only to its shareholders, but also to the state. I want the Banque to be sufficiently in government hands with being too much so”. Napoleon’s rule is an example of government intervention in the financial system of the country. It is tragic that we, in the twenty first century, are victim to the same mindset. Pakistan’s present regime forced resignation of Minister of Finance, Shaukat Tarin, and of Governor SBP, AJ Kardar, because they could not satisfy the government’s appetite for unrestrained borrowing of money.

The prerequisites for change are credible political leader ship and the rule of law.

Credible leadership makes a huge difference in building confidence of a business community. On July 1922, in the period of Great Depression after First World War, a scrupulously honest politician Raymond Poincare was elected Prime Minister of France.  At this time, Franc touched fifty to a dollar. Even before he had the chance to outline his policies, his presence reassured investors, small shopkeepers and thrifty farmers. Within a space of two days, the Franc rebounded to forty-three to a dollar and by the following week it was back at thirty five i.e. a rise of 40pc in value.

The rule of law is a precondition for economic growth. In essence, it is about regulating a relationship between the state and the market through legal institutions. It has two economic functions. First, it regulates and limits discretionary interventions of the state in economic activities. Secondly, it regulates the economic behaviour of individuals and enterprises to create an orderly stable environment with fair competition. This way economic development is both possible and sustainable. Honk Kong and Singapore are the best examples of an economic miracle through rule of law.

Our economy has been on the slippery slope of precipice since 1965 and the Rupee has plummeted since then. This position has exacerbated during last four years .Government loan has skyrocketed from Rs6 trillion to Rs12 trillion, almost doubling the size of currency. This spiral has resulted in a 100pc rise in prices during the same period. This is comparable to during the First World War when money in circulation doubled in Britain, tripled in France, and went up fourfold in Germany .Ultimately, in 1922, Germany lost all control of its budget deficit and in that single year expanded the money supply tenfold. The prices of various commodities increased accordingly.

When currency goes in free fall, investors, businessmen and almost all civilians try to convert their currency to precious metals like silver and gold, or to stronger currencies like dollar, pound etc. It also results in the flight of capital to safe heavens. However, once confidence in money is restored speedy flight back of capital emanates. To create an investment-friendly environment the following measures can help to steer our waning economy out of the vortex.

When the government scrounges loans or when excessive paper money is printed there is consequent debt which is paid by imposing taxes upon the people. The accumulated loans also cause an increase in prices. This shatters the confidence of the investors and hampers the growth of the economy. The Governor of State Bank of Pakistan is apparently independent but in reality he is too vulnerable to withstand pressures from the government – civil or military. He should be made as independent as the Governor of Bank of England, or as the Chairman Federal Reserve of USA, through a constitutional amendment. This way he will be able to formulate an independent monetary policy and enforce discipline upon Government spending.                                                                                                                                          The Governor of State Bank also has to be a top economist, who can focus on the core functions of the bank such as implementing the monetary policy, controlling the country’s money supply, becoming a “Lender of Last Resort”, regulating and supervising the bank industry, managing the country’s foreign reserves and gold reserves, and determining interest rates.

Central banks conduct their monetary policy by exerting some oversight on short term interest rates. They use these rates to lend money to commercial banks; influencing mortgage rates and other types of loans. Stocks and bond markets are also positively influenced by these benchmark rates. However, lower interest rates may stimulate even more economic activity so the effective monitoring of interest rates is needed to manage the rate of economic growth. This is a fine balancing act that is difficult for governments to oversee. Hence Central bank’s control over interest rate is one of the most effective tools to promote growth and keep inflation under certain limits.                                                                                                                                          Interest rates at which the industry can borrow money play a major role in the health of any country’s economy.

Pakistan’s present 12pc interest rate is too high. If it is made at par with India, i.e. 8pc, government would pay less interest yearly on its loans. Budget deficit would also be reduced accordingly. Similarly industry and commerce would become more competitive. This step would also help to bridge the current account deficit that has reached 1.7 percent of the GDP, during the first ten months of the current fiscal year.

The National Assembly should freeze the existing debt level for a period of five years. This will spare future generations from taxes levied to pay the debt. In April 1919 the French national assembly also fixed a limit on advances to the state. It imposed a ceiling forty one billion Francs on the Banque’s note circulation in order to control their finances. Therefore a similar step by our National Assembly can also help to avert further decline in our economy.

To conclude, it should be borne in mind that money has no motherland, financiers are without patriotism and that their sole object is gain. Merely asking politicians and others to send back their money can score political mileage but without results.  Capital will only return home by creating a conducive and safe environment for investors who should have the peace of mind that their savings can grow. Hence our leaders must instill a selfless political will in their hearts to break the begging bowl and unshackle the economy.

          The writer is a banker