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The four priority areas identified for private sector credit allocations were Agriculture, Exports, Small and Medium Enterprises and Information Technology

From Shamim Ahmed Rizvi, Islamabad
Aug 07 - 13, 2000

The Central Board of Directors of the State Bank of Pakistan, in its meeting last week, approved the recommendations of National Credit Consultative Committee (NCCC) for a credit plan of Rs.147 billion for the current (2000-2001) fiscal year. Earlier the NCCC, in its annual meeting, reviewed the monetary and credit developments during the outgoing (99-2000) financial year and proposed an enlarged credit plan for the private sector for the current fiscal.

The annual meeting of NCCC which was presided over by the Governor State Bank of Pakistan expressed concern regarding low private sector credit expansion and observed that government borrowing during the year were on the higher side largely on account of lower then estimated foreign resources.

The NCCC proposed an amount of Rs.147 billion as monetary expansion for the year 2000-2001 keeping in view the economic growth target of 5 per cent and inflation target of 4.5 per cent. Consistent with the budgetary estimate including an impact of Rs.32 billion of debt rescheduling, government borrowing for budgetary support is projected at net retirement of Rs.2.2 billion. It was also proposed in the credit plan that there will be no net impact of commodity operations. Non-government sector credit is estimated to grow by Rs. 89.2 billion which includes Rs.4 billion for autonomous bodies. Credit allocation to the private sector including Public Sector Commercial Enterprises (PSCEs) has been placed at Rs.99.8 billion. This amount includes Rs.14.6 billion as expected debt rescheduling of PSCEs. It is also expected that there will be a buildup in the foreign assets of the banking system and its impact will be Rs.60 billion on the overall monetary expansion.

The four priority areas identified for private sector credit allocations, consistent with the government policies, were Agriculture, Exports, Small and Medium Enterprises and Information Technology. Within the export sector, financing for value-added products in textile was to be accorded special attention.

The council was informed of the decisions taken by the State Bank of Pakistan to promote Information Technology exports. Information Technology has been made eligible for concessionary financing under Export Finance Scheme of the State Bank of Pakistan. The banks have been advised to accept contracts or export orders as collateral for financing Information Technology exports. The exporters of Information Technology have also been allowed to retain 25 per cent of their foreign exchange earnings in their own accounts.

For the first time an allocation of Rs.10 billion has been made for small and medium enterprises within the credit provision of private sector. Allocation to agriculture sector has been increased from Rs.39 billion to about Rs.50 billion in 2000-2001, i.e. a rise of 28 per cent.

To monitor and ensure prompt and better utilisation of credit allocations for different sectors, the State Bank has set up a credit Advisory Committee, at each of its 16 local offices, to monitor the progress and disbursement of credits in the priority sectors that are agriculture, small and medium enterprises, exports and the information technology.

The factors that caused higher government borrowing are lower than expected revenue collection (Rs.345 billion against Rs.356 downward revised target in 1999-2000 budget) and also a sharp drop in the flow of non-bank borrowings from the National Saving Scheme after application of a two per cent cut on dividend being offered to the savers. While the government borrowing escalated over many times than projected in the credit plan, the growth of credit to private sector during 1999-2000 remained sluggish which the Central Bank attribute to a slowdown in economic activities mainly in the industrial sector and dismally low capital inflows.

Low inflation and lower prices of cotton last season, coupled with steps taken by the present government after taking over in second week of October 1999 to impose margin restrictions on import letters on a wide range of goods, extra caution taken by the banks in advancing loans after a vigorous drive to recover loans from the borrowers are some of the factors, which according to the SBP perception, diminished credit demand of the private sector during last fiscal year.

The private sector, according to the SBP, showed usual seasonal retirement of Rs.14.8 billion in the first quarter (July to September 1999). It was in the third quarter that the credit demand in the private sector did not pick up and showed an insignificant growth of only Rs.7.4 billion. In the last quarter from April to June another sum of Rs.22 billion was retired. Thus overall, the bank credit to the private sector that include the public sector commercial enterprises grew by Rs 14.1 billion only during the whole year of 1999-2000 as against Rs.93 billion rise in 1998-99.

The Council was informed of significant drop in utilization of the export refinance and a slump in credit demand by the manufacturing sector mainly because of dismal performance of the industrial sector in 1999-2000. The small business and small industry also did not utilize the credit as was seen a year earlier.

The concern expressed by the NCCC on low demand of credit by the Private Sector and rising rate of borrowing by the government during the outgoing fiscal year is most appropriate and needs immediate attention of the economic managers of the country. Both the scenarios have their own reasons but this trend must be arrested. This year the government has estimated a Rs.85 billion revenue increase over last year's and hopes not to lean on bank borrowings. But this will depend on meeting the revenue target and controlling its expenditure. Strict financial discipline is the key to achieving these goals. An economy where credit demand by the private sector is low and government borrowing high requires workable policy prescriptions rather than ambitious new targets the futility of which is evident from last year's credit plan, which fell short of all its aims. The policymakers ought to clearly define their perspective on credit expansion. What is more, they need to create conditions for the private sector to regain the motivation to make use of the available credit opportunities.