July 16 - 22, 20

There is a general perception that high interest rate is responsible for spiraling inflation in the country, which is half true and half false. It is true that lending rate is high in Pakistan, but it is also a fact that that financial cost is only a miniscule percentage of total cost of doing in the country. While a small segment of business community has access to bank borrowing, overwhelming majority of total population still does not avail any credit facility of the commercial banks.

This could be best understood by looking at lending to farmers. Agriculture contributes around 25% to GDP but lending to this vital segment has not crossed Rs300 billion benchmark as yet. Some critics say bulk of the lending to farmers goes to the feudal lords who use the money for buying expensive cars and urban properties rather than for purchasing inputs i.e. quality seeds, fertilizers. Lately lending to manufacturing sector has also come down because banks are keener in investing in risk-free government securities than lending to the private sector.

Most of the commercial banks have reduced consumer financing to the lowest level, taking the plea that the risk of default is on the rise. One of the major segments of consumer finance was 'auto finance, which has shrunk considerably. This is evident from lower sales of vehicles. Sale of up to 1000cc cars has reduced and above 1300cc cars is on the rise. However, the expensive cars are sold in cash as the buyers don't seek financing. Those who used to change vehicles more frequently now prefer to retain the cars for longer durations. Double digit inflation in the country, rising unemployment and even reduction in salaries does not allow middle income group people to buy new cars.

Overall the banks have become less keen in lending to private sector, the reason being huge appetite of the government. Investing in government securities is risk free, no probability of default and on top of all the return is real attractive. As Pakistan faces drying foreign inflows the government has to resort to borrowing from the central bank as well as the commercial banks. It may not be wrong to say that despite substantial increase in revenue collection budget deficit has been on the rise. This phenomenon can be attributed to lavish spending by the elected representatives and lesser spending on infrastructure development.

Added to this is loss making public sector enterprises. Despite knowing that these enterprises are over-employed, political activists are being employed at very high salary. PIA, Pakistan Steel Mills and electricity distribution companies are the most notorious examples. In order to earn higher dividend from PPL, OGDC, PSO, SSGC, SNGPL and other listed enterprises there is regular and substantial increase in the prices of products being sold by these companies. The government on one hand collects higher corporate tax from these entities and on the other hand earns substantial dividend also. It is on record that if the government faces serious cash crunch these listed public sector enterprises are asked to pay interim dividend without releasing their periodical accounts.

While Dr. Shamshad Akhtar was Governor of State Bank of Pakistan payment of 5% return to depositors was made mandatory. Keeping in view double digit inflation in the country the central bank increased this mandatory payment to depositors to 6% from 5%. Some of the quarters raised eyebrows and went to the extent of saying that it would erode aggregate earning of commercial banks by Rs18 billion. However, analysts were of the consensus view that if earnings of banks have improved, they must pass on the benefit to depositors.

It is on record that spreads earned by the commercial banks are improving due to lower provisioning. Bulk of the deposits is being invested in risk-free government papers, also offering superb return. In an attempt to facilitate the government to borrow more, the central bank conducts reverse repo regularly. It is also on record that issue of Sovereign Ijara Sukuk has also provided an opportunity to Islamic banks to overcome 'surplus liquidity issue'.

Banking sector analysts are of the view Pakistan's economy is still cash rich and banks must focus on 'financial inclusion program'. During FY12 overseas Pakistanis remitted over $13 billion, which was mostly channeled through banking system. With the growing facility of ATMs throughout the country accountholders prefer to retain money in banks. This has improved overall deposits maintained with the commercial banks. Improving cash liquidity is also evident from increase in investment in National Savings Schemes and growth in the size of mutual fund industry.

Experts are of the consensus that Pakistan suffers from cost pushed inflation. The factors contributing to this phenomenon are higher commodity prices, depreciating rupee and lust of the government to maximize collection from petrol and gas development levies. This creates a paradox because the government is forced to pay billions of rupees as subsidy to power sector. One fails to understand the logic because hike in electricity and gas tariffs erodes competitiveness of the local manufacturers. Therefore, they suggest the government should completely abolish electricity and gas development levies.

Experts have the consensus that if the government is serious in containing budget deficit it should focus on enhancing economic activities in the country. Since GST is collected on almost all the products, improving purchasing power will enhance overall tax collection. They even go to the extent of saying that bringing down tax rate can improve overall tax collection.

They also say that instead of distributing billions of rupees under Benazir Income Support Program, the government should focus on creation of new job opportunities. Ensuring uninterrupted supply of energy products at affordable cost can help in optimizing capacity utilization and then to fresh investment for creation of new productive facilities. To achieve this fixing a minimum disbursement of funds to private sector can be made mandatory.