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SBP under crossfire over new monetary policy

The central bank has come under cross fire by two opposing groups—businessmen and bankers—over its latest monetary policy and a high discount rate.

The criticism by business, industry and investors is over the State Bank of Pakistan (SBP), the central bank, continuing its benchmark discount rate (DR) which signals the commercial banks to establish their own lending rate. The SBP has just announced maintaining the DR at 12 per cent for May and June, 2012— the last two months of the current fiscal year-2012. Historically, this period suffers more inflationary pressures than rest of the year. Businessmen are up in arms and demanding the DR to be cut down to a single digit, some demand it at seven per cent. It is essential to bring down the cost of borrowing, the cost of production and encourage declining investment in business and industry, they says.

The demand for lowering the DR has been made by all the big business and industrial organisations, including Federation of Pakistan Chambers of Commerce & Industry (FPCC&I), the Karachi Chamber of commerce & Industry (KCC&I), and the powerful All Pakistan Textile Mills Association (APTMA) which overseas the production and export of textiles.

The bankers are protesting because SBP has ordered upping the minimum profit rate for saving deposits to six per cent, from the current five per cent, effective May 1, 2012. Their clamour is against this rise because its annual burden on the banks will be around Rs15-17 billion. SBP ordered raising the profit on saving deposit account in order to generate more savings, and partly compensate the depositors whose value of money is bring constantly eroded by a high degree of inflation — ranging between 12-13 per cent a year. Until May 2008, the banks were paying a meager profit averaging 2.1 per cent, which SBP then had raised to a minimum of five per cent. Depositors, economists and analysts have been highly critical of this low payout rate, especially because the banks in Pakistan enjoy an average spread of 7 to 7.5 per cent — one of the highest in the world. While investment and deposits have been going down because of the unattractive profit rates, the SBP has failed to bring down the commercial banks’ high spread.

There are also indications that by raising the profit rate, the SBP may, indirectly, be encouraging the banks to raise their lending rates as a compensation. But it is just a speculation, so for. The lending rates at present range between 16 to 18 per cent. The growth in lending credit to the private sector is down to 4.2 per cent during July-March, 2012. On the other hand, the growth in bank lending to the government during the same period was Rs591 billion including Rs373 billion by commercial banks, and Rs218 billion by SBP.

Lending more and more by commercial banks and SBP, to the government to cover its budgetary deficit, has starved the private sector, business and industry, as the banks have very little liquidity left for the private sector. The banks are lending bulk of their cash to the government on attractive 13-13.5 per cent interest with a zero-rate of risk. The SBP is worried over the commercial banks “over-investment in government securities. It has warned the banks against what it terms as “financial disntermediation.” Advances to deposit ratio (ADR) of the banking sector has plunged down from 69.7 per cent in 2007 to 53.6 per cent in 2011- a 16 per cent decline in four years.

“In terms of solutions, the economy needs deep and decisive fiscal and energy sector reforms and an early realisation of planned foreign financial inflows to mitigate uncertainty,” SBP says in its new Monetary Policy statement announcing the DR at 12 per cent. It leads to depreciation of the Pakistani Rupee. SBP, analysing its own and government’s policy failure to bring down the inflation rate to a single digit, the central bank says, “ it is difficult to achieve cost of living index of 9.5 per cent in fiscal year-2013 and eight per cent in 2014.” “ In march 2012, the year-on-year inflation was 10.8 per cent.” In the current economic conditions, it is projected to remain in double digit during fiscal year-2013,” it says. High inflation and poor external balances are hitting the rupee, too.

While exports are not likely to meet the fiscal year-2012 projection of $25 billion — and could fall short of the target by up to $4 billion, other multilateral and bilateral aid inflows are down too. In fact even the FDI inflow is down by 66.5 per cent during July-March — the first nine months of fiscal year-2012 compared to the like period of fiscal year-2011, mainly as result of the constant outflow of foreign portfolio investment, SPB reports. It says “the FDI investment that has landed in the nine month period is just $ 466.50 million against $1,393 billion in the like period of fiscal year-2011.”

Views expressed by the author are his own and do not reflect the newspaper’s policy