State Bank of Pakistan continues to include IOUs from India during Partition on its balance sheet!

The superb JP Koning looks at Indian monetary history during partition in his recent post. I had blogged a similar piece earlier as well.

During Partition, there were differences between India and Pakistan over distribution of assets and liabilities of RBI. The RBI was to give share of assets equivalent to notes which circulated in Pakistan. However, there were more notes than RBI imagined leading to differences. All the details are there in RBI history (1935-51).

What is even more interesting is that these assets continue to be recorded by Pakistan central bank (State Bank of Pakistan)! Being a history buff, I should have checked this.

Koning notes:

If you look at the SBP’s 2016 financial statements, you’ll see an interesting line item called “Assets Held With the Reserve Bank of India”:

Source

Go to note 14, and you’ll see that:

“These assets were allocated to the Government of Pakistan as its share of the assets of the Reserve Bank of India under the provisions of Pakistan (Monetary System and Reserve Bank) Order, 1947. The transfer of these assets to the Group is subject to final settlement between the Governments of Pakistan and India”

So it seem that Pakistan never received what it believes to be its fair portion of the RBI’s assets. For almost 70-years now it has carried these IOUs on its balance sheet (see historical date here). That’s a long time to hold an asset that is unlikely to be collected! The reason for this odd balance sheet item can be found on page 568 or the aforementioned 900-page RBI tome. Between the founding of the SBP in July 1948 and the July 1949 cutoff date for note remittances to the RBI, more Indian rupees had filtered over the border into Pakistan than expected. As such, Pakistan was able to stake a larger claim on the RBI’s assets than initially estimated.

Indian officials, who were not happy with the amount of assets they were sending over to Pakistan, now claimed that only those notes already in circulation in Pakistan as of July 1948 could legitimately be remitted for underlying assets. Any notes that were imported into Pakistan from India after that date simply would not count to the final tally. Pakistani disagreed. In March 1949 the Indian government informed the bank that “pending negotiations with the Pakistan Government further releases to them should be withheld.” This was unfortunate news for the SBP. It had effectively issued Pakistani rupees without a reciprocating asset to back them.* That’s where the two parties stand to this day—the SBP grudgingly holds the RBI’s IOU on its books as reminder that it never got its perceived fair share of the RBI’s assets.

Wow. See the latest annual report of SBP and older balance sheets as well. You see how SBP continues to revalue the assets from RBI.

Likewise, there is another item on asset side Balances due from Governments of India and East Pakistan.

All this was on Assets side of SBP. Where are they adjusted in liabilities side? On liabilities side, they are included in Other liabilities. In other liabilities, there is a category called provisions for other doubtful assets under which these outstanding balances are adjusted.

Fascinating history. How figuring central bank balance sheets is vital to figuring so many things…

Koning adds how all this is relevant for current discussion on European monetary union:

This same sort of dynamic would surely characterize a euro break-up. If Europeans are given 6-months to convert their euros into new national currencies like the German mark or the Greek drachma, you can bet that everyone will ship their euros to Germany. Drachmas, like the Indian rupee, are sure to be devalued. And if the final distribution of banknotes is to serve as the marker for divvying up the European Central Bank’s assets, then Germany would get most of them. Were it to be prevented from getting its share, then Germany would end up in the same situation as Pakistan, with a shortage of good assets to back up all the fresh marks it has issued.

Hmm..It is all so similar..

 

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