Reduction in the financial
cost alone cannot boost investment in the manufacturing sector
By SHABBIR H. KAZMI
Jan 17 - 23, 2000
This is the second time since mid 1998 that the State Bank of Pakistan
has reduced the interest rates. Similarly, the rate of return on various products of
National Saving Schemes (NSS) have been reduced. The objective was to facilitate borrowing
by the private sector. However, some of the analysts say that reduction in interest rates
alone cannot boost borrowing by the private sector. This is only an effort, by the GoP, to
reduce interest expense on its borrowing. This impression is supported by the continued
efforts to curtail yield on T-Bills.
Some of the analysts say that the financial institutions in Pakistan
suffer from 'surplus liquidity crisis' and the GoP is just taking the advantage. This
seems to carry weight if one looks at the prevailing 'Badla rate' in the capital market.
This rate has virtually came down to the level of interest rates charged by the financial
institutions. This decline has been despite increase in the daily trading volume
increased demand for funds. The KSE-100 index has almost doubled since June 1998.
According to these analysts this surplus liquidity is due to two
factors, hardly any fresh borrowing by the private sector and outcome of November 1999
recovery drive. This surplus is expected to further increase with the commencement of the
second phase of recovery from defaulters of less Rs 100 millions.
One wonders if the interest rates are low why the private sector is shy
to borrow. One of the reasons is that the corporate sector is no longer borrowing the
money for BMR and expansion. The other reason is that the corporate sector itself
currently suffer from surplus liquidity. This is evident from the fact that 319 listed
companies declared dividend for the year 1998-99.
Some of the analysts say that the reduction in rate of return on NSS
products has caused serious concern for the investors. These products were preferred due
to higher rate of return and security of investment. The level of distress has intensified
due to delays in encashment and payment of interest by National Savings Centres (NSCs).
While there may not be any instruction from the GoP to defer such payments, the Eid rush
could have been the reason for slow processing at the NSCs.
However, many investors were ready to believe that the GoP may put
embargo on encashment and stop profit payment after the recent judgement of the Supreme
Court regarding 'Riba'. Another reason for recent run on NSCs was the rumour that the GoP
may deduct the already paid interest from the principal amount at the time of redemption.
Such rumours were easily accepted by the investors. It is a common
belief that NSS are not fully collaterized and in case of any run for encashment, NSCs
will not be able to redeem the full amount. This is based on the experience of foreign
currency accounts (FCAs). These accounts were frozen on the eve of nuclear tests conducted
on May 28, 1998. This was done due to precarious position of foreign exchange reserves.
The successive governments had used a very large percentage of these deposits for debt
servicing and foreign trade. Knowing that the GoP would not be able to honour withdrawals
these accounts were frozen. Many investors in NSS now fear that GoP will not be in a
position to redeem if there is a sudden and large scale requests for encashment.
One of the priorities of the current economic managers is to restore
the confidence of investors. Reduction of interest rates is part of this exercise but it
has failed to lure the investors. Investors are still reluctant to make any long-term
investment in the manufacturing sector.
Most of the sectors which were attractive in the recent past are no
longer viable due to over-supply. These are textile, sugar, synthetics, fertilizer, energy
etc. Information technology and energy sectors offer enormous potential but also require
huge investment and joint-venture formation.
Foreign investors are keen in forming join-ventures but unless local
investors come forward no such facilities can be created in the country. Amicable
resolution of HUBCO issue can play a vital role in restoring confidence of investors. But
there has been no head-way even after the dismissal of Nawaz Sharif government. Similarly,
privatization of state enterprises offer investment opportunities for both local and
foreign investors but the process has been extremely slow due to lack of commitment. There
has been a proposal to sell the shares of state enterprises through stock exchanges but
final decision has not been made as yet.
It is encouraging to note that investment is being made in real estate,
capital market and gold. However, it is necessary to channel the funds to manufacturing
sector. This can only ensure economic recovery and boost GDP growth rate. The reduction in
interest rate can also help in containing cost-pushed inflation and enhancing the
competitiveness of the local manufacturers. Therefore, it is necessary that GoP removes
all the impediments and restore the confidence of local investors. Till the time local
investors are shy neither the foreign investors will come to Pakistan nor privatization of
state enterprises will be possible.