LENDING A HELPING HAND TO PRIVATE SECTOR
TARIQ AHMED SAEEDI
Jan 24 - 30, 2011
The government's need of funds to meet its expenditures has made it a biggest possessor of assets of banks, which are inclined to finance short-term government borrowing to earn profits in the face of high interest rate. High interest rate scenario is discouraging private sector to meet project financing needs from borrowings of banks, that, themselves, are risk-aversive with regard to lending to the private sector.
Critics say State bank of Pakistan is adamant on pushing up the rate on the pretext of stubborn inflation that sticks to double-digit mark.
High interest rate, besides affecting private sector severely, has slowed down the process of economic growth of the country to two or three per cent per annum.
Private sector has gone into figurative hibernation for want of funds and capital, or embraces costly impact of high interest rate on production and growth activities. Banking experts are of the opinion that tight monetary stance is tantamount to strangulating the private sector that has played and can play major role in revival of economic growth. Specifically, strong private sector with adequate cost of fund is vital to alleviate poverty in addition to build sound financial system in Pakistan.
Critics argue that government is not consciously cognisant with the harsh realty confronted to Pakistan. If that were so, the intensity of the problems would be lessened. At least, what government can do is contain wastrel of public money on official trips. It is insensible on the part of a nation that has rising numbers of poor people, to have foreign excursions by its officials, and that are so with inflated groups of their kith and kin, and to get million of rupees lost on mere this account. Why visit, stay in homeland after all teleconferencing has shrunk thousands of miles distance to a desktop. That is also essential to justify promises of austerity that government made at the time of assuming control over treasury benches. People have right to ask question where is the austerity? Has it lost its vigour in the lavishness of parliaments and president house? People are rising. They want employment, good health, and enlightened education. If they somehow are awakened to the call of revolution, and driven by the examples set in Tunis, Algeria and Egypt, then every thing would get out of control.
Government borrows from banks to clear circular debts and commodity operations. Experts believe this makes liquidity stuck in non-productive operations. Unfortunately, the flow of money from banks benefits only few corporations or big names. Knowledge of customer apart, if such liquidity is adequately used in SME and micro financing, then people's standard of living can be improved on self-sustainable basis.
The government is minimising reliance on borrowings from the central bank, and thus, may play supportive role in controlling inflation. Its borrowing from the central bank was recorded at Rs168 billion as compared to Rs240 billion from commercial banks during July-Jan 2010/11.
Borrowing from the central bank results in inflationary pressure. As the government is shifting its direction towards commercial banks lending to cut budgetary deficit, there is a hope of controlled inflation and hence there is no need to shot up interest rate.
However, the government needs to minimise reliance on liquidity from banking system altogether, and has to develop fiscal space by initiating fiscal measures. That, apart from cutting unnecessary expenditures, merits broadening of direct tax net. Government shift towards commercial banks may cape it all to ostracise private sector, according to an analyst.
Both Prime Minister and President are for economic reconciliation: to bring in to confidence all political parties on issues like RGST and others. Rhetoric cannot alone assuage people's excruciating pains amidst economic hardships.
The government is overall indifferent to the solution that lies in its close visibility. It is better to bring all political parties on a point of convergence, but actual problem has origin in economic mismanagement and there is a dire need of looking at the corresponding remedies therefore. Simply, the government has to cut its non-development expenditures, as repeated umpteen times on media and by politicians even in the ruling party.
When solution to economic problem, say inflation, can be solved through fiscal measure then why to cling with monetary correction. Money supply control is backfired and shooing away private debtors from industrial expansion and modernisation.
Industrial production is slowing down owing to weak fundamentals and it needs to have stimulant to back to its previous speed. July-Nov 2010 indices measuring growth of large-scale manufacturing sector depicted an abysmal picture of industries. Energy crisis has already forced many industrial units to close down their operations. Law and order situation is also haunting people across the country. Terrorist acts are stoking fears and security concerns among citizens taking lives of civilians and carving out psychological scars on their consciousness. Sandwiching between two warring factions, civilians feel threatened and highly insecure to invasion from either side. Since this is all happening not on deserted border but in the centre of urban and rustic settlements, its shockwave has impactful economic and social implications. Economic implication is reflected on negative growth of large-scale manufacturing of 2.3 per cent in first five month of current financial year. Unemployment is subsequent to slump, resulting also in increased crime and suicide rates.
Considering rising incidence of non-performing loans as an outcome of high interest rate, analysts advice the central bank should refrain itself from recourse to tight monetary policy as a good gesture to curtail numbers of bad debts. On the contrary, there are also few experts, who do not like to link non-performing loans (NPLs) with the high interest rate, opining the real causes of NPLs are energy crisis, implications of floods, and precarious law and order situation in the country. However, one cannot deny the effects of high cost of borrowing on cost of production compounding the impacts of other problems.
According to State bank of Pakistan, total NPLs stood at Rs509 billion in September 2010, up six per cent over Rs476 billion in June 2010. Recovery of loans was not either good during July-September, 2010, showing a decline of 42 per cent to Rs11 billion as compared to Rs19 billion in the corresponding quarter last year.
Market analysts say if SBP refrains itself from pushing up interest rate further in the upcoming monetary policy on 29th this month, it will not be a destructive decision at all, since there is still a difference of 0.25 per cent between discount rate, which stands at 14 per cent, and six-month Karachi interbank offered rate (Kibor). Therefore, it should be adjusted prior to go for another hike, which obviously would be detrimental to the growth of private sector.
Pakistan's economy is nearing on the verge of collapse. Private sector will certainly save the economy from falling into the abyss provided it is first provided with power to withstand economic downturn.