June 18 - 24, 20

Ignoring the opposition, the state bank of Pakistan (SBP) had been following high interest rate regime for long, maybe because of pressure from the international monetary fund (IMF). Tight monetary policy might have helped in containing inflation to some extent but definitely caused damage to the economy.

While high interest added to the cost of production and eroded competitiveness of local manufacturers, entrepreneurs became too shy to invest in new productive facilities. Added to this has been extensive load shedding of electricity and gas that has plunged average capacity utilization to less than 50 per cent in some of the industries. The situation has further been aggravated because of huge borrowing by the government. Now banks even do not prefer to lend to the private sector because they could earn high and risk-free income by investing in the government securities.

Experts say while business community is critical to high interest rate and electricity and gas outages, the reality is contrary. Business community prefers to borrow from banks rather than investing its own money. This statement is best understood when one examines the balance sheet and income statement of some of the companies belonging to textile and cement sectors. One may wonder why the financial cost is so high. On detailed examination, it becomes evident that what exactly they have been doing.

Sponsors mostly borrow in the name of public limited companies and then acquire equity in private limited companies or make a clean lending, mostly interest free or at a nominal cost. The profit earned by the private limited companies goes to sponsors' pockets and shareholders of public limited company have to bear brunt of inflating financial cost. In some cases, financial cost eats up the entire profit and companies post loss after tax. This becomes one of the reasons for rising nonperforming loans.

Having said that it is necessary to point out the interest rates charged on loans extended to small and medium enterprises, agriculture and housing are too high. The government, the central bank, and even the commercial banks are fully aware that the construction industry is a major source of employment and provides impetus to 40 other industries but no lending policy has been farmed to ensure extension of loans on soft-terms.

Let one point be very clear that the country needs specialized companies for housing finance because by virtue of their mandate, commercial banks are not entitled to indulge in long-term lending. On top of all, nearly 90 per cent of total deposits kept with commercial banks are of less than one-year tenor, which creates a mismatch and renders commercial banks unsuitable for housing finance.

Experts say, commercial banks must stick to their original mandate of proving working capital or running finance and let housing finance business be done by specialized financial institutions.

It is also said that high energy cost adds to inflation. It is correct largely because in an attempt to raise nontax revenue, the government collects huge sums in the name of petroleum levy and gas development surcharge. All the successive governments, including the present one, have been collecting huge taxes on energy products but keep on saying that they provide billions of rupees subsidy to the power sector. It is on record that lately revenue collection has increased mainly because of rise in import of petroleum products. This could be best understood by looking at phenomenal increase in monthly motor gasoline import to 250,000 tons from 80,000 tons.

Another point is that around the world governments keep price of high-speed diesel low because it is used in public transport. Lately, in Pakistan diesel has become more expensive as compared to motor gasoline. To contain the cost, operators of public transport switched over to CNG use, which was also not liked by the policy planners. To discourage CNG use in public transport not only its price is being increased with regular intervals, but an organized campaign has also been initiated to discourage CNG use.

Some experts say that the ever strong lobby of oil companies is not allowing use of cheaper fuel be it CNG or biofuel (E-10). They even go to the extent of saying that E-10 has not become a reality only because of oil companies and lately another group having vested interest has been lobbying for switching over to LPG from CNG. There is a need to resist this campaign because Pakistan will have to import LPG and establish dedicated dispensing stations.

One of the inferences is that Pakistan suffers from cost-push inflation and the reasons include higher commodity prices in the international markets, depreciating rupee and above all pathetically low capacity utilization.

In the recent past, textile units located in Punjab were working for three and half days due to load shedding of electricity and gas. In such a prevailing scenario, manufacturers just cannot meet delivery schedule and also fail in achieving economy of scale.

It is also to remind the private sector that instead of complaining about electricity outages, it should establish in-house power generation facilities. Experts agree not only cost of electricity produced at in-house facility is lower, but uninterrupted supply can also be ensured. They even need not to invest in such facilities because some reliable companies offer generators on rent, which makes life hassle free because the user has to pay for the number of units consumed only.

Business community is also advised to focus on cost optimization approach rather than cost cutting. As a first step, they should minimize reliance on public sector electricity distribution companies. This transition may be difficult for those who have been pilfering electricity.

It is on record that the government as well 'consumer protection associations' have completely failed in controlling unabated price hike. Now the consumers have to play their role by refusing to buy products at higher prices. Initially, this may be difficult because those having ill-gotten money will not be ready to accompany them.