ISLAMABAD, 26 January 2004 — The Pakistani central bank has decided to continue its easy money policy, claiming it is helping the economy, despite fears of rapidly rising inflation. Easy money policy (EMP), as of now, will continue until June 30 when the current fiscal 2004 ends. But it will be reviewed, said State Bank of Pakistan (SBP), the central bank. The decision was taken in the SBP’s just-unveiled Monetary Policy Statement (MPS).
SBP forecasts good business prospects for entrepreneurs at home as well as Pakistan’s foreign trading partners and exporters to this country because of “low international prices of imports,” that are likely to continue.
The weighted average lending rates moved up to 5.29 percent in November 2003, after reaching the lowest level of 5.09 percent in August that year, but they are inching up SBP says. Blue chip corporates could borrow at 3 to 4 percent for more than a year, but, small and medium enterprises had to pay up 9.0 percent or even more. Ironically, the poorest borrowers were offered microcredit at around 18 percent. So there goes out of window, the welfare aspect of the monetary policy, if any.
Deposit rates for savers went down further to 1.20-1.45 percent during July-November, 2003 from 4.0 percent in January-June of that year. It led to a severe criticism of SBP’s monetary policy. Many critics describe it as “anti-savers, “ and “anti-poor.” It means the savers paid from their own pocket to the extent of 2.55 percent, rather than getting a profit. This is because the inflation rate is close to 4 percent, while the depositors received 1.45 percent. Once the savings rate, which is one of the lowest in the world, go down further and savings habits discouraged further, what will happen?
The SBP has been criticized on this count, as savers continue to suffer, but they have no lobby to voice their resentment. At the same time, the government has reduced almost to half the profit it pays on its National Savings Schemes (NSS). It has led to an outcry from small savers and the poor.
The lending rates and a huge reduction in the profit rates to savers, have raised the bank spread further to 3.84 percent in November, up from 3.46 percent in August 2003.
SBP says Pakistan economy appears to be on the road to economic recovery in view of the ongoing monetary expansion, driven by an all-time high credit offtake by the private sector. Interest rates have begun to rise marginally, but at their current levels they are not expected to adversely impact investment initiatives. There are indications that the recent uptrend of price inflation may continue in the near future but it is not expected to pose any major threats. The incidence of strong and stable rupee, together with favorable balance of payments position should continue to dampen the impact of inflationary pressures, SBP insists.
The National Credit Consultative Council, that advises the SBP on credit volume, in its latest recommendation has favored a further credit expansion. SBP informed NCCC that the net credit expansion to the private sector was Rs. 156.8 billion during July-December 2003. Credit disbursement to all sectors was broad-based. The offtake by industries was Rs. 48 billion. There was “a significant growth in consumer financing and small and medium enterprises (SMEs).” It’s a new feature. Because the credit for autos, consumer durables, housing, farming, and related services will help the country achieve its 6.0 annual growth target, SBP Governor Dr. Ishrat Hussain says. It was also NCCC recommendation, before SBP’s new MPS, that “credit to the private sector should not be contained even if it implies that the money supply may exceed the targets slightly.” Banks are advertising consumer and housing finance at around 9.0 percent.
SBP had adopted the EMP in June 2001 to boost the economy that had remained sluggish since late 1990s. But EMP was further eased after 9/11 when expatriate Pakistanis, especially those working in the Gulf and North America, rapidly increased their home remittances because of the US-led monitoring of international cash flows and overseas deposits. Overseas Pakistanis had feared that their money could be frozen for one reason or the other. The remittances created a record of $4.3 billion in 2003. This inflow is projected at $3.6 billion in fiscal 2004.
The remittances were a blessing for Pakistan as it improved its balance of payments, forex reserves, and helped increase imports. But, the inflow created piles of rupee liquidity with the banks. That in turn led to a decline in banks’ lending rate for business and industry, over the last two years. Cheap credit for working capital, trade and exports makes the economy look up. But, banks offered no significant long-term credit because they were saddled with Rs. 245 billion in defaulted loans in 1990s, and they refused to take a risk.
As part of EMP, SBP cut the discount rate from 14.0 percent in 2001 to 9.0 percent in 2002 and further to 7.5 percent in November 2002, signaling to the banks to slash their lending rates. It also reduced forex purchases from the interbank market during July-December, 2003 to $884.5 million, compared to $2,937.5 million during the same period of fiscal 2002. These moves forced the cost of funds to decline significantly in fiscal 2003. The weighted average lending rates of commercial banks declined to 229 basis points to 5.29 percent between July and November 2003. At the same time, the weighted average deposit rates for savers declined 45 basis points to 1.45 percent. As inflation rate was close to 4.0 percent it meant that savers suffered because they were losing at least 2.55 percent of their savings.
In fiscal 2003, the average deposit rates for savers had already declined 212 basis points. As such, the differential between the lending and deposits rates rose to 3.86 percent by November 2003 — down from 5.68 percent in June 2003. The banks maintained their own profitability, but at the cost of savers.
The rates have begun to inch up according to SBP forecasts, after bottoming out at historically low levels. At their current level, they are still on the lower side and are “not expected to disturb the investment plans of the private sector.” The broad money (BM) growth of 8.1 percent in the first half of 2004, is “well below the 6-month target set for end-December, 2003.” But, the reserve money (RM) expansion at 16.4 percent is higher than the 6-month target.