REDUCTION IN INTEREST RATE ALONE CAN'T SPUR ECONOMIC ACTIVITIES IN THE COUNTRY
SHABBIR H. KAZMI
Aug 13 - 19, 2012
In its first monetary policy announcement for FY13 State bank of Pakistan decided to slash policy rate by 150bps to 10.5%, from 12%. However, the central bank as usual emphasized on taking stringent measures for resolving fiscal imbalances and energy crises. It also blamed the Government of Pakistan (GoP) for not paying any attention to curtail and eventually retire direct borrowing from the central bank. Nonetheless, the Board of Directors gave higher weightage to declining private sector investments and deceleration in inflation. Taking into account of the improving Pak-US relationship and leading to release of US$1.12 billion from the account of Coalition Support Fund, the board decided to slash the discount rate
Earlier at the last auction of Treasury Bills At an aggressive participation was witnessed by the primary dealers as bids worth Rs424 billion were submitted against the target of Rs300 billion. However, the central bank accepted bids worth Rs323 billion with the face value of Rs350 billion. The cut off yields for 3, 6 and 12 month tenure declined. The central bank mobilized Rs16 billion from 3-month, Rs156 billion from 6-month and Rs150 billion from 12-month papers. The auction raised hopes for rate cut in the market and the expectations came true.
According to figures released by the SBP, lately money supply declined by 2.40% to Rs183 billion as compared to a decline of 1.98% to Rs132 billion) during the same period last year. Even through M2 growth remained in negative zone, Government's borrowing from commercial banks went up by 147%WoW or 101%YoY to Rs181 billion during four weeks of FY13. On the flip side, Government retired Rs187 billion borrowing from the central bank as compared to retirement of Rs25 billion during the same period last year.
The latest numbers released by the SBP reveal that the total deposits of the scheduled banks declined by 5%MoM to Rs6.1 trillion in July this year. However, during 7MCY12 the deposits have registered growth of 4.0% CYTD compared to 4.7% growth witnessed in the total deposits during the same period last year. The decline in deposits was due to June-end impact as well as increase in consumption factor due to Ramadan. This decline in deposits was also revealed in the money supply figures, in which M2 declined by 2.40% during the month, while incorporating the total time and demand deposits decline was at 4%FYTD. On the same pattern, the 6-month KIBOR was also down by 6bpsMoM and averaged out at 12.01% during first month of the current financial year.
Credit off-take of the total banking sector remained stagnant during July, in fact declined marginally by 1.0%MoM to Rs3.7 trillion, as against 7MCY12 credit-off-take surge by 6.0%. The advance to deposit ratio (ADR) of the banking sector reached 61%, up 216bpsMoM during July and 112bps during 7MCY12. On the other hand, total investments of the banking sector showed a significant surge of 5.6%MoM to Rs3.3 trillion during July and during 7MCY12 the investment of the banking sector increased by 13%. This growth under the investments head was in line with the extraordinary growth of Government borrowing. The Government borrowed Rs181 billion from commercial banking channels in July, registering growth of 147%WoW and 101%YoY. To meet the fiscal imbalances, the Government relies heavily on commercial banking sector.
Analysts expect the total deposits of the banking sector to overcome this inadequacy in short term with expectations of returning back to normal levels. However, heavy reliance of the Government on banking borrowing is expected to keep the investments side higher, while advances are expected to remain stagnant.
While money supply position tell a different story, inflation rate in August is likely to remain high. Vendors cognizant of the impulsive buying during Ramadan are indulging in profiteering. However, those responsible for ensuring price stability also seem to have become partners in the booty. Food inflation is also due to shortage being created by the vendors. A common complaint is that during Ramadan 'booty' collectors become proactive and no single group can be blamed for this. In this endeavor activists of main-stream political parties as well as ethnic and religious parties are involved.
Experts are also of the opinion that depreciation of Pak rupee, hike in POL prices and electricity and gas tariffs are also fueling inflation in the country. Despite increase in electricity and gas tariffs the government has been failing miserably in containing load shedding duration. There is no realization that the lust for more revenue is rendering Pakistani manufacturers uncompetitive in the global markets.
Tough, there is a common complaint that high interest rate is eroding competitiveness of the local manufacturers, it is also a fact most of the industrial units suffer from gross inefficiencies and wastages. The most notorious are manufacturers of textiles and clothing and cement. Bulk of the income of the companies belonging to these two sectors goes towards financial cost. While the sponsors of these units are all critical of the government polices, they never accept that their establishments are inefficient.
Experts say energy cost and financial charges can be contained by improving inefficiencies, wastages and undertaking BMR. They say instead of complaining about electricity shortages manufacturers of textiles and clothing should focus on co-generation of electricity as well as installing diesel based standby electricity generation facilities. They even go to extent of saying that since most of the units are involved in rampant theft of electricity and gas they are just not willing to pay the cost. However, they tend to forget that others are paying the cost of their pilferage. The time has come to make it clear that every one consuming electricity and gas has to pay the cost; nothing comes free in this world.