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Outlook 2012 – I: Growth is SBP’s responsibility

February 16, 2014
January 03, 2012


Business Recorder LogoAfter a difficult and bumpy ride in 2011, Pakistan’s monetary and fiscal challenges for the 2012 are numerous, with fewer opportunities.

Deteriorating domestic economic conditions will be bad for the economy and may put further pressure on Pak Rupee that could lose another 10-12 percent of its value in 2012 unless the economy manages to show unexpected prowess and the country manages to obtain foreign funding.

Apart from inflation and fiscal deficit, the present government’s biggest worry is continued low economic growth that has caused a rise in poverty and joblessness, debt financing, foreign currency liquidity constraints, rising circular debt and possibly growing risk that the country may face a negative balance of payment (BoP).Remittances are the only area of hope, which would once again do well due to the Arab Spring as the Middle East is the largest contributor.

Rising trend of global remittances further suggests that the inflow of remittances is expected to grow by 5-7 percent annually.

But meeting exports target (volume) could be a difficult task, which fell in the last fiscal year (July-June) due to soft rice and sugar prices in the international market.

The increase in export earnings was due to a rise in global commodity prices, which in real terms means that Pakistan missed out an opportunity to increase export earnings because of a shortfall in export volumes.

Current challenges faced by the export sector are unfavourable domestic market conditions due to high energy prices and energy shortages.

High borrowing cost due to SBP‘s continued tighter stance and political uncertainty are also hindering business growth.Why do we complain that growth prospects are very few, foreign investments have dried up, exports cannot flourish due to energy shortages and corruption? Did we ever try to identify or address the real cause? Is there any serious effort to rectify the problems? Are we sensing that urgency to address the issue immediately? Are we aware of some debilitating economic consequences of this delay?It is the central bank’s responsibility to sense the urgency and to foster environment conducive to growth to stimulate the economy by creating new job opportunities in the private sector.

Leave aside the inflation worry, which is globally considered a secondary issue; growth is the first choice preference to correct the economy.

The nation is facing a severe stagnation period.

In such conditions, it makes more sense to create new jobs rather than promote an environment or a situation in which there are no jobs.

Efforts aimed at trying to contain inflation for years do not make a greater sense.SBP‘s tight monetary policy stance is not working as an effective tool of discipline.

The central bank is required to contribute towards economic shortcomings by bringing major changes in its policy stance and take proactive measures to correct the deteriorating economic conditions.

There is an urgency to mend things and it is SBP‘s responsibility to create a conducive environment for growth.Growth is purely SBP‘s responsibility; it has nothing to do with the fiscal policy.

Clearly fundamentals are bad and policy is terrible.

The biggest indicator to keep a check on the cause behind a decline in GDP growth is scheduled banks’ deposit/advance data.

If we look at the SBP‘s scheduled banks’ past five years deposit growth profile, it has jumped by Rs 2.6 trillion to Rs 5.415 trillion and during the same period banks’ advances have gone up by a mere Rs 947 billion to Rs 3.357 trillion, which only confirms SBP‘s weak effort and slackness to spur growth.There are many worrisome factors in the financial sector that require immediate attention.

Piling up of government securities by banks, as the outstanding stock as of December 31, 2011 has surged to Rs 3.679 trillion that has clearly exceeded the banks’ total lending of Rs 3.357 trillion, further confirms the real cause of fall in Pakistan’s growth rate.

The break-up of investments in government papers is: T/bills Rs 2.515 trillion, PIBs Rs 881.9 billion and Sukuk Rs 282.3 billion.Latest figures of investment in government security based on SBP data suggest that in the absence of cap allowing banks to invest any amount in government paper, investment in government paper has surged to an all-time high of 67.94 percent, as banking sector has been blessed with an opportunity to comfortably park its funds in government securities instead of lending money to new businesses.

This could have never been possible without central bank’s assistance.With so much of excess liquidity available and government struggling to increase growth rate and create new jobs due to growing population, which is increasing by 2 percent or 3.7 million annually, it is SBP‘s tight policy stance that should be blamed for causing stagflation, as it has choked all growth prospects.

Such issues should be given top priority by the political leadership and our politicians should discuss this serious matter in Parliament and with Governor State Bank of Pakistan in the presence of parliamentary finance committee.SBP should choose the right direction, as it has no right to punish the growing population due to no fault of their’s.

For how many more years will the economy/businesses suffer due to a high interest rate environment the central bank has maintained due to its inability to reduce government borrowing, ever-rising currency in circulation that has reached Rs 1.685 trillion, fiscal deficit that has been hovering around 6.5 percent.

Non-performing loans (NPLs) surged to an alarming high of 14 percent that has blocked rupee liquidity equivalent to Rs 650 billion caused bySBP‘s high discount rate policy and banking spread.In a span of 5 years, due to an exorbitantly high interest rate environment, Pakistan’s domestic debt is laden with additional burden averaging over 12 percent, which during this year, has increased by around Rs 2.6 trillion or USD 32 billion that is more than the foreign funding received by the country.

SBP has to choose between good (growth) and evil (inflation containment).The real problem faced by economy is credit expansion that leads to growth, which is not happening due to continued high discount rate policy.

High discount rate encourages banks to put all their money in a government security that is less risky asset and offers hefty return.

Therefore, unless discount rate is chopped by another 4 percent to 5 percent, businesses will never flourish, private sector will never grow, jobs will never be created and stagflation would continue to haunt the nation.

SBP should no more act as banks’ agent to sell government securities; it should shoulder its responsibility to boost growth rate by gradually reducing the discount rate and let the commercial banks decide if they want to increase their income through credit expansion.

Conventional wisdom says that any bank in the world would happily park all its funds in a central bank pool, which is the safest place to invest funds and especially if that bank is provided with an opportunity to earn a banking spread of 7.5 percent.

Such policies would certainly be unacceptable at any decent place.

Why do we have to cry and bang our heads blaming corruption and tax evasion for all the ills, when the regulator is itself a party to such practices as it prefers to articulate and implement a policy that only suits banks.

High banking spread is one of the major causes of sharp rise in currency in circulation and a decline in national savings ratio and promotion of dollarization.With a low discount rate environment banks will be forced to look for new avenues, which would encourage lending to private sector that would ultimately give much-needed boost to economy.

Further, if banks do not offer depositor’s market-based rates after a discount rate cut then depositors will surely shift their funds to government instruments, which should continue to be depositor-friendly.Slashing discount rate by 5 percent will do a world of good for the country the annual cost of domestic debt financing that has risen to Rs 6.439 trillion because of a high discount rate.

It will be reduced by 41.6 percent, which is Rs 322 billion or USD 3.579 billion annual saving.The lesson that we can learn from current global financial crisis is that economies depending on foreign money cannot survive on borrowing for ever and have to find domestic means to generate sufficient revenue and increase exports earnings.

India can be taken as the most recent example.

Despite having forex reserves of USD 303 billion, which is good enough to cover 9 months of imports, India has become a casualty due to global meltdown and is struggling to mend its economy.The real cause of worry/financial unrest in India is because the foreign money has stopped flowing in.

It has forex reserves of $303 billion and currently holds USD 275 billion foreign money.

Out of which Non-Indian Resident (NRI) funds consist of USD 52 billion of which USD 43 billion matures in June this year, but does not carry significant risk as NRI can be considered safe money.

The biggest concern is that the remaining amount of USD 223 billion that matures by July 2012 carries a huge risk due to European crisis as India’s total stock of portfolio investment is currently around $138 billion and short-term debt is $137 billion.

Suppose if a large part of funds gets matured and not rolled over, it could be extremely difficult to arrange these funds.

India’s growth is already slowing down while its deficit is ballooning.

At present, India spends around USD 130 billion annually on oil purchases because it consumes 3.182 million barrels per day and with simmering Iran issue, higher oil price could be a disaster for India.

So India is standing barefooted on dynamite and its exchange rate may remain under pressure for some time.Pakistan too is a deficit economy, so it should draw a valuable lesson from India and try to get rid of the Western methods; and it should decrease its foreign dependence, which is purely artificial means of fixing things.

Hence, instead of complaining of drop in FDI or no foreign Investment, State Bank of Pakistan should come up with some innovative ideas.

It should not delay using its monetary tools in a more effective manner to gather domestic growth momentum.

There is sufficient room in our unexplored domestic economy that can face the challenges.

Pakistan should more seriously focus on agriculture sector growth, as global food demand will not fall and it can become the biggest source of earnings.

What is required is that we need to spend more money through increased bank financing to modernise agriculture sector.

SBP is therefore required to activate the sector by offering fresh incentives.

Construction could be another major source of growth that can kick-start the stalled economy.

So nothing is lost, all that we need initially is a professional input from subject matter experts who know their job well.Although we are not a party to the Western blunders, we are facing the consequences of our own wrongdoing as we failed to implement a long-term effective policy due to a lack of vision by our policymakers.

The problem is that our economic growth is largely based on hormones and such growth always has health concern.

We have to realise that this type of growth has a pretty short life, so we have to shift our stance and devise a strategy towards long-termgrowth.We are still growing 23-24 million tons of wheat that was achieved about 10 years ago.

Our cotton growth is down by 2 million bales; 10 years ago we were growing over 14 million bales.

We are growing rice in abundance, which is easy to cultivate.

But rice export is losing its charm overseas due to each importing country’s specific domestic need.

We do not have the will/vision to cater to the need as per importers’ requirements; so rice export could fall.

Our food and vegetable exports remain very thin.

This area, therefore, does not heed much discussion.

Food and vegetables have good overseas market demand but we have never bothered to meet the international market standards required to meet import standards and most importantly, we can only export raw material and yet learn the finishing art.Pakistan should learn from the recent change/shift of economic growth pattern from Western economies to Eastern economies, which is due to increased commodity production on substantial rise in global commodity prices.(To be continued)

Copyright Business Recorder, 2012
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