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Pakistan's monetary policy and credit situation

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Credit plan revised in the wake of post N-Test economic developments and subsequent rescheduling of external debts

Special correspondent, Islamabad
Sep 06, 1999

Credit plan for the year 1998-99 was consistent with the overall monetary policy objectives, targeted GDP growth rate of 5.5 per cent and price inflation of 8 per cent during the year. Growth in money supply was originally estimated at 13.6 per cent or Rs 164 billion. External sector was expected to be neutral with respect to change in domestic liquidity. Therefore, domestic credit expansion estimated at 12.8 per cent was identical with monetary expansion of Rs 164 billion. However, the Credit Plan had to be revised in the wake of economic developments entailing from nuclear detonation, restrictions imposed by multilateral institutions and other countries, and subsequent rescheduling of external debt agreed with IMF and under the aegis of Paris Club. The revised Credit Plan mainly reflected the accounting impact of rescheduling of foreign debt. Net foreign assets (NFA) of the banking system, which were assumed to be neutral in their impact on the domestic liquidity in the original plan, were estimated to contribute to monetary expansion to the extent of Rs 9.9 billion. Growth targets of domestic credit and domestic liquidity were set at Rs 83.4 billion (6.51 percent) and Rs 93.3 billion (7.7 percent), respectively. Government's budgetary position was targeted to achieve a net retirement of Rs 58.1 billion to the banking system compared with the original targeted net borrowing of Rs 43 billion. Credit target for the private sector and Public Sector Commercial Enterprises (PSCEs) was set at Rs 98.5 billion. This included retirement of Rs 16.4 billion on account of debt repayment/rescheduling of PSCEs. Credit allocated to autonomous bodies was enhanced from Rs 3.5 billion to Rs 20 billion including Rs 16.5 billion provided for the restructuring of WAPDA (Rs 5 billion) and KESC (Rs 11.5 billion).

Data available for 1998-99 shows that money supply went up by 7.4 per cent compared with a much larger expansion of 14.5 percent during last year but was close to the target of 7.7 per cent in the credit plan. Slow growth of money supply compared to last year was mainly due to reduced government borrowings for budgetary support resulting from rescheduling of foreign debt. Net foreign assets (NFA) had an expansionary impact on money supply as against a contractionary impact last year. Unlike the usual pattern the private sector credit did not expand during the first half of the year for a variety of reasons including slowdown in economic activity both at home and abroad, vigorous recovery efforts by banks and partial liquidation of Foreign Currency Accounts (FCAs). The contribution of Net Domestic Assets (NDA) and NFA of the banking system in overall monetary expansion during the year stood at Rs 55.7 billion (4.3 percent) and Rs 33 billion compared with an increase of Rs 167 billion (15 per cent) and a decline of Rs 13.9 billion respectively.

Government budgetary borrowings from the banking system during the year increased by Rs 59.4 billion on gross basis. However, net budgetary borrowings declined by Rs 34 billion since the government accumulated Rs 93.4 billion in the Special Account with SBP for foreign debt retirement. Government budgetary borrowings during last year were Rs 48.5 billion. Credit to government for financing its commodity operations registered a rise of Rs 3.6 billion compared with Rs 10.6 billion last year.

Credit to private sector (including PSCEs) during 1998-99 amounted to Rs 98.8 billion compared with credit plan target of Rs 98.5 billion and actual expansion of Rs 83.8 billion last year. Commercial bank credit to private sector expanded by Rs 63.7 billion net of significant retirement of credit extended against FCDs compared with Rs 64.3 billion last-year. Credit to PSCEs showed a rise of Rs 1.6 billion compared with an increase of Rs 9 billion in 1997-98. Credit to autonomous bodies, also increased by Rs 12.6 billion (including Rs 11.5 billion credit to KESC for its restructuring) compared with retirement of Rs 0.9 billion last-year. Net credit expansion to private sector by specialized banks amounted to Rs 14.5 billion during the year 1998-99 compared to Rs 11.2 billion in 1997-98. Major share in this credit expansion came from ADBP i.e. Rs 12.2 billion while IDBP's share stood at Rs 2.6 billion.

Credit to private sector did grow to the extent of Rs 98.8 billion during the current year despite of an unprecedented retirement of Rs 34.2 billion upto the first week of September 1998 compared with the peak retirement level of about Rs 14.5 billion in the middle of September 1997. The slow pick up of private sector credit during early period of the year was due to uncertainty that gripped the market following nuclear detonation and a host of actions like freezing of foreign currency deposits and imposition of margin requirements on opening imports letter of credit. The period after detonation witnessed a slow down of trade both in imports and exports that contributed to slow down in economic activity. Further, cautious and prudent lending by banks together with their vigorous efforts of recovery of the defaulted loan also contributed in the slower growth of bank credit. Credit to the private sector through 'other financial institutions' expanded by Rs 18.9 billion compared to a retirement of Rs 0.7 billion. The entire expansion was through swap funds arrangements with Al-Meezan Investment Bank (Rs 11.1 billion), Crescent Investment Bank (Rs 2.4 billion) and Pak-Kuwait Investment Co (Rs 6.1 billion). TABLE-1.

Bank credit to the private sector picked up after September but at a slower pace. As of end-February 1999 it showed a rise of Rs 61.3 billion with commercial bank credit of Rs 46.9 billion to private sector proper. To stimulate the demand for domestic credit so as to avoid adverse impact on the economic activity in the country and to meet the possible shortage of liquidity entailing unification of exchange rate leading to withdrawals of FCAs, SBP took a number of measures including adjustments in cash reserve ratio and statutory liquidity requirements, reduction in repo (Repurchase offer) rate and injection of liquidity through Open Market Operations (OMOs). Commercial banks also played their part and reduced their lending rates. Specifically, SBP measures included reduction in repo rate from 16.5 per cent to 15.5 per cent with effect from March 4, 1999 and further to 14 percent and 13 per cent effective from April 3, 1999 and May 19, 1999 respectively. This was done in an effort to create an environment for banks to lower their lending rates so that the credit demand by the private sector could pick up. On March 8, 1999 restriction on credit to PSCEs (excluding autonomous bodies) was withdrawn but to ensure prudent lending banks were advised that requests from PSCEs for credit lines be considered on merit subject to strict observance of prudential requirements. Further, State Bank adjusted its statutory liquidity requirements and cash reserve requirements downward in anticipation of rapid withdrawals from frozen FCAs following a unification of exchange rates. The changes were made in order for money market to stay liquid.

On may 19, 1999 statutory liquidity requirements were reduced from 15 percent to 13 percent and cash reserve requirements from 5 per cent to 3.5 per cent. The required liquidity ratio maintained by NBFIs was also reduced from 14 percent to 12 percent with effect from May 26, 1999.

Reductions in statutory liquidity requirement and cash reserve requirement led to the releases of Rs 38 billion to the scheduled banks. These additional funds available to scheduled banks were expected to partially offset the liquidity loss caused by the liquidation of FCAs in addition to support efforts aimed at reducing lending rates offered by the scheduled banks. The result was that during May 1999 credit to private sector increased by Rs 16 billion to Rs 83.5 billion and finally settled at Rs 98.8 billion as on June 30, 1999 slightly higher than the target of Rs 98.5 billion for the whole year.

Financing of important segments of the private sector continued during the year. Bank credit for exports picked up sharply and by end-June, 1999 amounted to Rs 26 billion compared with Rs 12.9 billion last year in spite of a decline in export in dollar terms. The increase was basically due to higher growth of the exports eligible for export finance facilities in Rupee terms and inclusion of new items like yarn of less than 30 counts in the eligible items. Cotton financing excluding CEC amounted to Rs 16.7 billion up to June 26, 1999 against Rs 17 billion last-year. Similarly, disbursement of agriculture loans, both for production and development purposes, also continued. ADBP, FBC and commercial banks disbursed Rs 42.8 billion during 1998-99 as compared with Rs 33 billion in 1997-98. Of this, an amount of Rs 34.2 billion was disbursed as production loans and the remaining as development loans. TABLE-2.

Data on sectoral credit shows that credit to manufacturing sector (other than LMM and small loans for industry) increased by Rs 19.1 billion during July-May 1998-99 against Rs 31.3 billion during the same period last year. Of which an amount of Rs 9.2 billion was disbursed for fixed investment compared with a rise of Rs 2.6 billion during the same period last year. Credit to manufacturing sector during July-May, 1998-99 for working capital requirements was however, lower (Rs 9.9 billion) compared to last year (Rs 28.7 billion). Banks' investments in private sector proper increased by Rs 10.2 billion against a meager increase of Rs 0.2 billion in the same period of 1997-98. TABLE-3.


Table for Monetary Policy

Statement showing disbursement of agricultural

production and development loans

(Million Rs.)

July-June, 1998-99 July-June, 1997-98

Name of Bank Production Development Total Production Development Total

Loans Loans Loans Loans

ABL 988.1 2.2 990.3 819.8 4.7 824.5
HBL 2692.1 258.9 2951.0 1581.8 18.5 1600.2
MCB 505.7 6.5 512.2 586.9 9.5 596.4
NBP 2477.0 166.9 2643.9 2325.5 154.9 2480.5
UBL 131.5 7.1 138.6 180.7 9.3 190.1
Total C. Banks 6794.4 441.6 7236.0 5494.8 197.0 5691.7
ADBP 22010.2 8161.1 30171.3 14103.8 8249.8 22353.6
FBC 5411.2 28.8 5440.0 4908.4 20.5 4928.9
Grand Total 34215.8 8631.5 42847.3 24507.0 8467.3 32974.3


Table for Monetary Policy

Pakistan: Change in the composition of Federal Taxes

1989-90 1998-99

Amount Share Amount Share

(Rs. Million) (%) (Rs. Million) (%)

Direct Taxes 15,642 15.0 110,000 35.7
Sales Tax 18,574 17.8 71,834 23.3
Customs 48,584 46.6 65,292 21.2
Central Excise duties 22,433 20.6 60,904 19.8
Total Tax Revenues 88,591 100.0 308,030 100.0