AFFORDABLE CONSUMER FINANCE-SECRET OF GROWTH
July 30 - Aug 5, 2012
Human memory is short but not too short to recall the days when real estate business was booming, construction and property development was all around in the country while one has to wait for months to take the delivery of the cars on the back ever increasing demand for new vehicles. Why the boom had to come to almost all segments related to consumer finance available at a single digit rate 6-7 percent during 2005-07.
The eye catching growth had started attracting investment from all over the world especially in financial sector where international players arrived to Pakistan which no doubt added value to banking and financial services in the wake of transfer of technology and innovative financial solutions. It is was not the banking industry alone which was the beneficiary of the booming economy but the trickledown effect of the growth was glaringly reflected in the stellar growth of property development and the real estate sector and over 150 industries allied to automobile and real estate industries.
Actually the access to affordable finances is the key to growth as the financing facility is like fuel to run a vehicle or generate power, to create opportunity, or generate activity. However the activity in otherwise vibrant sectors like automobile industry, Real Estate and construction industry and hundreds of down stream industries cost of financing started to drop with the increase in cost of financing which gone up today from 14 percent to 20 percent and may be more in some cases. Consequently the number of bank defaults increased manifold especially in auto financing, home loans and personal loans. The size of non-performing loans took a quantum jump after the increase in mark up rate in the country.
It is pertinent to point out that the foreign investment comes only when the domestic investment is on the rise because it is the local market which is the best recommendation for any investment. Inactive and idle domestic players are factors behind drastic drop in foreign investment.
There are two major reasons behind stagnant growth in private sector which include high interest rate and high rate of inflation while the single factor behind high interest rate and high rate of inflation was the huge government borrowing which today has crossed Rs1.64 trillion mark which not only crowded out the private sector on one hand but also contributed to the high rate of inflation persisting for the last four-five years in the country.
Although the private sector has always strongly pleaded to the financial regulators for a single digit interest rate which may help putting spark in the economy, however the banks are happy with the huge government borrowing because it is safe and secured lending at a high rate with a sovereign guarantee cover. The financial experts however have a strong feeling and reservation on the dependence of the banking sector on the government borrowing which is in a way against the professional norms.
CUT IN INTEREST RATE LIKELY
It is learnt that the discount rate of the banks is likely to go down by 50-100 bps which may help to bring down the current interest rate from 12 percent to 11-11.50 percent when the State Bank goes to review its Monetary Policy sometimes next month.
The financial analysts are of the view that there are positive signs for a cut in interest rate in next monetary policy review on the back of were secondary market yields, potentially benign rate of inflation in the current month of July and improved signs in external flows including near realization of Coalition Support Fund (CSF) and other friendly countries may provide a cushion for the financial regulators to look into possibility of a 50bps cut in discount rate in the upcoming monetary policy review due in first week of August 2012.
It is important to mention that the government through T-Bill has managed to exceed the target of Rs275billion, and raised Rs360billion. Cut-off yields eased by 5bps driven by renewed participation; heavy participation in 6 months papers to the tune of Rs207billion and for one year papers Rs208billion has given the signal regarding possibility of a 5-100 bps cut in interest rate.
Although the sensitive price index data suggests food prices on the rise pre-Ramadan season, however the impact of higher food inflation in July is likely to be diluted by two favorable drivers including up to 8% decline in average petroleum product prices (CPI impact ~30bps); and 19% cut in gas prices effective July (CPI impact ~50bps). In this backdrop it is expected that CPI inflation likely to clock in around 10.3%, much lower than last month's 11.3%.
It would not be out of place to mention that the release of inflows worth US$1.12billion under Coalition Support Fund is about to materialize this week, where the cabinet has recently approved formal signing of agreement between Pakistan and US.
The financial analysts were optimistic on near term improvement in dollar rupee parity due to improved inflows which in a way has also given confidence to the financial regulators to comfortably make repayments of $1.2 billion to IMF by December 2012.
Although the fiscal pressures eased to a great extent yet the unabated government borrowing has crossed Rs1.64 trillion marks that must be a risky factor in possible cut in the interest rate in the forthcoming Monetary Policy.
The high interest rate adversely affects economic activity on one hand while it has multiplier effects on general prices on the other hand. The inflation erodes purchasing power of the low income groups due to devaluation of currency. In this backdrop, rising general prices and drop in rupee value (Rupee is at 95/96 against a dollar) means that the candle of the poor is burning at both ends.
It is said that Pakistan has printed new currency notes of Rupees 592 Billion, during Jun 2011 to 25 Jul 2012 , which is not the solution to overcome the problems. Printing excessive currency notes on the one hand and continuous borrowing on the other is leading to higher inflation and increment in general price level, which is deepening the misery of the entire country.