Why Pakistan's bank loans will remain flat

Islamabad - Continuing economic uptick, low inflation key factors

Loans from commercial banks will stay at 6 per cent on the back of continuing economic uptick and low inflation, a cheerful central bank says.
The State Bank of Pakistan (SBP) is buoyed with what it described as prospects of strong economic growth and inflation staying "within comfortable bounds" as it unveiled its monetary policy for the next 2 months.
The new monetary policy is supported by 8-month low inflation, the SBP says. Inflation was 3.2 per cent in March, the Pakistan Bureau of Statistics said on April 3.
"The annual consumer price index clocked in at an 8-month low of 3.2 per cent in March as subdued food prices offset the impact of rise in petroleum prices," the bureau said.
SBP Governor Tariq Bajwa, announcing the monetary policy committee's decision, said the committee is of the view that "some time may be allowed for the impact of the recent policy developments [like 10 per cent market-related depreciation of the rupee against the dollar] to unfold". In view of this "it has decided to maintain the policy rate at 6 per cent."
The MPC was of the view that the prospects of achieving an 11-year high growth remain strong, with average headline inflation within comfortable bounds for financial years 2017-18 and 2018-19, the latter of which starts on July 1. But, this high growth rate and low inflation outcome have been accompanied by a high current account deficit.
"Along with a high fiscal deficit, this can affect medium-term stability of the economy. However, recent adjustments stemming from greater exchange rate flexibility, active monetary management, as well as a visible improvement in exports and home remittances, are expected to bear fruit for the mid-term, in terms of sustaining the growth momentum without posing a risk to the stability." The SBP feels the effects of the 10 per cent devaluation of the rupee against the dollar, between December 2017 and March, will have to be watched. The SBP calls it "a market-related" phenomenon.
The US dollar was rising, quoted on April 4 at Rs15.50 for buying and Rs115.75 for selling in the interbank market. It was trading at Rs116.20 for buying and Rs116.60 for selling in the open market. Just a day before, the dollar rate had gone up to Rs116.60 for buying and Rs116.80 for selling in different cities. This was the highest rate the dollar has ever seen. The SBP had a meeting with money changers to examine the decline, but Abid Qamar, chief spokesman of the SBP, did not disclose what was discussed.
However, Zafar Piracha, secretary-general of Exchange Companies of Pakistan, said people are buying dollars as if this is the best investment. In sharp contrast to what the SBP is trying to preach regarding the alleged strength of the rupee even after its 5 per cent devaluation in December 2017 and another 5 per cent in March, Alfalah Securities reported on April 4 something that can be described as another shock.
"We expect a further depreciation of around 5 per cent in the rupee-dollar value by the second half of 2018 that will be followed by [yet another] approximately 5 per cent to 7 per cent devaluation during 2018-19," it said in an economic brief.
"We expect further market-driven downward adjustment of the exchange rate, in response to depletion of forex reserves, with the magnitude and duration of rupee's weakness depending on when Pakistan decides to sign up another IMF programme to get credit, or manages to arrange foreign exchange reserves, bolstering hard currency from alternate resources." Before the announcement of the monetary policy, which retained the interest rate at 6 per cent, analysts were forecasting a raise of 25 basis points in the rate, which did not happen. Their reason: the deprecation of the rupee will continue.
Analyst Mohammad Sohail, CEO of Topline Securities, insists the central bank is delaying the inevitable.
"It has to raise the interest rate to arrest the external account pressures."
One of the biggest effects on the economy is, and will continue to be, is the widening current account deficit, which grew to $10.8 billion during July-February of 2017-18 - close to 50 per cent more than the same period in 2016-17 due to growing imports. The government had imposed regulatory duty to cut down imports that did not work, in spite of the simultaneous "market-related" 10 per cent devaluation of the rupee.
While the economy is generally looking up, it has some weak spots which have to be looked into. The SBP has warned that financing of the high current account deficit is challenging as a healthy growth in foreign direct investment and higher official inflows are insufficient to finance this deficit completely.
The central bank said the full impact of the recent exchange depreciation on exports and imports is going to unfold gradually in the coming months. But besides the efforts to narrow down the current account deficit, the bank and the Ministry of Finance say they plan to timely mobilise external inflows, both official and commercial, which will play a pivotal role in maintaining adequate level of the SBP's forex reserves and anchoring sentiments in forex markets.
The forex reserves of SBP were down to $11.78 billion as of March 22, 2018. Exports rose 12.2 per cent compared to a decline of 0.8 per cent in the same period of 2016-17. Home remittances sent by overseas Pakistanis rose 3.4 per cent in the first 8 months of 2017-18 compared to the same period a year ago, and are expected go up to $20 billion, if not more.
The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.

• Pakistan