The Plastic, Boom or Bust?

One of the lessons learnt rather late in our economic life was that the Harvard model for developing countries was flawed, economic emancipation does not come about by “exports” alone, it is necessary to invigorate the domestic economic sectors and invest in the infra-structure to fuel growth. Financial modus operandi has two modes, “how to do it” and “how not to do it”. Regretfully in Pakistan we usually go the “how not to do it” route, with disastrous results.

Concentrating on credit as fueling the domestic economy the target sectors are (1) electronic consumer market (2) automobile and (3) housing. Commercial and personal loans play a major part in economic resurgence of any country. Because of competition financial institutions adopt innovative ways of packaging loans and selling it to the right clientele. Selecting the right client should have become an art form by now, this includes verifying his/her antecedents, this is followed by disbursement. However problems usually occur because of circumventing of procedures and lax controls, the actual bouquet of problems vary thereof. With private commercial banks now actively pursuing the credits for individuals, it should be expected that things will remain within control because of more stringent checks and balances as opposed to the rather laissez faire once-upon-a-time attitude of the national commercial banks (NCBs) where influence and patronage used to dictate the disbursement of loans rather than any merit criteria.

In the 70s and 80s cooperative scams fleeced the public. Then came the bank defaults mostly due to fraud, force-multiplying in the mid-80s with the first whiff of political rule. It took the best part of the 90s to get our financial institutions onto an even keel. According to a recent NEWSWEEK report the 21st century raison d’eter for loan default may be credit cards and small consumer loans. With liberal distribution of credit cards and easy consumer loans everyone wants to purchase something “today” what they had been earlier saving to purchase “day after tomorrow”. Automobile loans, consumer financing and the mode of disbursement thereof could be of concern, their need can be assessed by comparing the per capita incomes in developed countries to our own. From an economy that was proud of its savings we have become a spending one, not bad in itself if it can be kept under control. While giving out liberal consumer loans is bad enough, there is virtually no check on debts accrued because of liberal use of credit cards. The gist of the NEWSWEEK report was that small consumer loans becoming overdue spells bad news for unstable economies that are trying to firm up their positions. The Asian currency crisis of 1997-98 highlighted the fact that Asia’s economies were too reliant on foreign borrowing and demand. The almost total reliance on “exports” had to be replaced by development of a modern domestic consumer shopping culture, possible mainly through introducing credit cards on a mass scale. While the introduction of credit cards into consumer culture in Asian nations has been extremely successful, in South Korea this has backfired.

Seoul went economically on a binge when the Asian economic crisis peaked in 1998, phasing out limits on credit-card cash advances and offering tax breaks for credit-card spending, trying to create a plastic-driven economy overnight. What is worrisome is that this is being emulated in Pakistan and other South Asian countries today. While the rest of Asia was still waking up economically Korea enjoyed a boom period from 2000 to 2003 because of household spending. Korea’s economic growth has now been stunted by because the credit card which was designed to boost consumption became a drag on consumption, growth becoming a problem with household-debts becoming overdue. GNP growth has fallen under 3 percent last year and unemployment risen to nearly 4 percent as South Koreans have struggled with household debts now accounting for 117 percent of GNP, the heaviest in the world. Those eclipse even mature economies like the US and UK. With still more than 1 million consumers paying off credit cards debt with credit cards (known in Pakistan as famous “Balance Transfer Facility” (BTF)), the situation may get worse before it gets better.

Korea’s major debtors pre 1997-98 were corporations, they are now individual consumers. Both crises came to a head because the aggressive government drive to grow the economy went astray through reckless lending, badly executed by the commercial banks. Once South Korean regulators had taken reins off credit-card sales and use, consumers were given cards without even the most elementary of credit checks, in many banks 100% applicants were approved. One glaring result, 27 % of the homeless in Seoul now have credit cards. Hong Kong and Japan have been more prudent in lending money or issuing credit cards. The expansion-minded South Korean Ministry of Finance and Economy kept pushing credit card sales to boost consumption further, despite regulators receiving adequate warnings of escalating household debt as early as May 2001. As larger banks abruptly cut credit to delinquent cardholders in late 2002, other banks also pulled back on credit cards and all household loans, in some cases banks started demanding payments before loans were due, it put millions of families into turmoil. With 15 percent of the population technically insolvent, the number of South Koreans who are more than three months behind on payments is expected to rise from 3.7 million to 4 million by the end of 2004. Most are of the 30-40 age group, young people who used plastic to stock up on “Gucci” and “Armani” goods.

In Pakistan there are three areas of concern, viz (1) in the present climate of backs being awash with deposits without the commensurate number of corporate and/or industrial clients to give loans/credits to, the commercial banks are trying to outdo each other in small consumer loans, adopting the easy way by dishing out credit cards in large number and throwing caution to the winds about due verification (2) the automobiles and electronic consumer items are mostly of foreign manufacture and (3) personnel tainted by the banking scams of the 80s and early 90s continue to be in senior management positions of financial institutions. If former World Bank employee Governor SBP Dr Ishrat Hussain can have the courage to talk about taking IMF out of Pakistan’s economic life, where is his conviction in sustaining the pressure of not permitting BCCI-type “professionals” remain in positions of banking influence, particularly when respected international institutions have documented to SBP their culpability in BCCI’s collapse. The tragedy is that this is well known in the banking community. The bank’s “success bubble” in 2003 is mostly artificial based on profits on “capital gains” in the stock market. What about actual banking profits? While the State Bank of Pakistan (SBP) has oversight regulations meant to exercise some control on the increase of this open-ended debt, why should we spend anything on any products that has material less than 75% Pakistani in origin, mainly for automobiles, electronics and household electricals? Unless this is done “the deletion” program will remain a subject of fiction.

South Korean economy was modelled largely on Pakistan of the 60s yet it outstripped Pakistan because it did not have to go through Zulfikar Ali Bhutto’s disastrous nationalization of everything insight. Cynical humour has it that even “Bundoo Khan” is reported to have given tax officials rupees three lacs in 1973 to show a tax liability of only Rs.10000 in order to avoid nationalisation. Yet the comparison is too close for comfort, twice within 5 years South Korea has got major economic problems of the nature that Pakistan could probably never sustain economically. While we must not do anything that will stunt economic growth, and there is a genuine fillip given to the economy because of credit cards, it is necessary to judiciously control the use of plastic in the economy. Without throwing the baby out with the water, we must exercise prudence in ensuring that instead of the plastic eventually bouncing in Pakistan, it should be monitored so that it becomes an effective part of a caution-inspired boom.