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Pakistan’s Quarterly Performance & Hiccups – Nov 26

November 26, 2015

In its quarterly performance review State Bank of Pakistan is of view that private sector lending will surge due to its accommodative monetary policy stance and increase in energy supplies.

According to SBP it will lead towards better growth condition, as economy is likely to pick up. Emphasis is on seasonal growth in the agriculture sector based on improved condition in the commodity sector. The view expressed by SBP is correct if applied correctly.

However, there are many hindrances, which need to be checked and corrected. Unless the faults are removed and errors are erased, or else economic growth to remain subdued.

There is a mixture of SBP policy rate, Open Market Operation (OMO) and PIB coupon rate. Its accommodative policy stance is only helping borrowers to rollover at cheaper rates, which is only reducing the borrowing cost. But due to lucrative spread offered at (2.75 pct Approx), it will never encourage banks to lend to new businesses.

This is because in comparison to the short end of the curve versus long end. The two are poles apart and is too attractive for banks to consider shifting its portfolio towards private sector.

Central Banks Policy tilt is towards banking sector to encourage them to invest in government paper instead of using its policy tool in such an effective manner that banks are compelled to lend to corporate sector.

Therefore, the purpose of OMO injection of Rs 1.347 Trillion at 6.05 pct is not for economic stimulation, instead it encourages banks to invest in government securities for accounting purpose, as it kills two birds with one stone. Injection through OMO does not increase government borrowing and it also helps to contain deficit. Increase in lending risk deficit to rise. Circular Debt is another unmanageable monster, which is getting closer to Rs 700 Billion marks.

To overcome its fear SBP needs to further cut its policy rate by 150-200 basis points and ask Ministry of Finance to slash coupon rate by 250-300 basis points, as it is already ahead of the curve.

It will not only help the economy to make the much needed boost, simultaneously reduction of rates & coupon will sharply reduce annual deficit financing that will easily surpass Rs 20 Trillion debt by end of 2105. Next year PIB maturity/Rollover exceeds Rs 1.5 Trillion.

Further, real economic growth has been awful and inflation at 1.7 pct (July-October) is not in line with its projected policy rate. Recent records suggest that SBP’s past stance has been too cautious and inflation projection has been mostly off the target. It may have miscalculated commodity prices in the international market, which could be one major cause.

Capital Adequacy Ratio (CAR) above the local benchmark of 10 pct and international benchmark of 8 pct is not very surprising when Advance/Deposit Ratio is down to 50 pct. It’s obvious sign of weak domestic economic condition and a very worrying sign for any sensible economy.

Slowdown in exports and shortfall in revenue collection is due to fiscal weakness and flawed policy and SBP should not be held responsible for this huge gap, which is the mother of all the ills.

@asadcmka

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)

 

 

 

 

 

 

 

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