ISLAMABAD, 31 January 2005 — Interest rates are going to rise further, but the rupee will stay stable in the next six months. State Bank of Pakistan (SBP), the central bank, also forecasts the state of several other business and financial indicators, for the current fiscal 2005 that ends June 30. It is part of the latest Monetary Policy Statement (MPS), which guides the banking system, the money market and foreign trade.
The MPS revolves around two rather conflicting objectives — curbing rising inflation and ensuring high growth. “SBP, on the basis of the balance of risks, will shift from an accommodative to a neutral monetary policy stance during the next six months to suppress the current accelerating trend in core and nonfood inflation. It will wring out inflationary expectations from the economic system and discourage speculative and nonproductive financing. But it will be easing supply of loanable funds to the creditworthy corporations, individuals, farmers, and small & medium enterprises (SMEs), at non-negative real lending rates (NNRLRs)”, MPS says. SBP, using NNRLRs description for the first time, however, did not explain it. But, it reflects, that the present interest rates are “still low and negative in real terms.”
The real MPS signal: “SBP will continue to tighten the monetary policy, by raising interest rates (ITs), but maintain a healthy balance between suppressing inflation and facilitating investment, growth and employment in a non-inflationary environment.” Banks are currently quoting lending rates 0.5 to 1.0 percent above the Karachi Inter Bank Offered Rate (KIBOR). KIBOR now ranges between 5.98 and 6.11 percent. However, big multinationals and corporates can pick up cash even a shade below the KIBOR — at 5.50 percent. But, a big telecom company has just raised Rs. 6.0 billion credit at 8.625 percent. It is indicative of the coming cost of credit. In short, the SBP’s tightening of monetary policy can push lending rates up in the range of 8.5 to 9.5 percent in the coming months, industry sources feel.
The weighted average lending rate was 6.49 percent, as against the meager 1.21 percent profit rate paid to depositors. Even now the depositors are getting between 1 to 1.75 percent — which may damagingly dampen savings, discouraging smaller savers, in the long term. SPB signaled the monetary policy tightening last week, raising the cut off yields on the benchmark 6-month Treasury Bills (TBs) to 4.32 percent, on 3-month paper to 4.33 percent and on 12-month paper to 4.98 percent — a recent record high.
The private sector credit take off in six months to Dec. 25, 2004, was a record Rs. 244.4 billion, up from just Rs. 155.3 billion in the like period of fiscal 2003. Credit rose further to Rs. 285 billion in January, 2005. The SBP credit projection for the whole of fiscal 2005 is Rs. 200 billion. It means the year may actually end with credit shooting across Rs. 300 to 350 billion.
This massive credit surge is attributable to on-going growth momentum of the economy, attractiveness of consumer loans, supported by — still below normal level — average lending rates. The credit capacity of the banks, at the same time continued to expand due to inflow of Rs. 166.2 billion they had previously invested in government paper, and the growth in bank deposits by Rs. 95.0 billion.
The credit off take was broad based, utilization-wise. Manufacturing industry borrowed Rs. 127.5 billion, or 52.2 percent. Consumer finance accounted for Rs. 39 billion or 15.9 percent, Rs. 27.8 billion or 11.4 percent was taken by trade, Rs. 20.3 billion or. 8.3 percent by services sector, Rs. 12.6 billion or 5.2 percent by transport and communications, and Rs. 8.7 billion or 3.6 percent by farming. Textiles, the biggest industry borrowed Rs. 95.4 billion or 75 percent of manufacturing sector borrowing.
But all that glitters in the industry is not entirely owed to bank credit. Very sizeable — and unquantified, private funds are filtering fast into the mainstream business and industry. It is partly funded by the large inflow of home remittances sent by overseas Pakistanis working in the Gulf, Saudi Arabia, Middle East and North America.
Within consumer finance, most credits — Rs.22.1 billion — were used to buy or lease autos, followed by housing that accounted for Rs. 8.6 billion and credit cards Rs.3.5 billion. While a Go, Go lending is going, following SBP’s 3-year long easy monetary policy, analysts are getting worried over the quality of consumer loaning and its recovery prospects. A central bank check on their credit portfolio is needed.
Pakistan’s external competitiveness continued to increase despite relatively high domestic inflation rate that pushes up export prices, SBP says. The real effective exchange rate index showed a 6.9 percent depreciation of the rupee in July-December, 2004 up from 3.8 percent in the like period of 2003. Exports, the major beneficiary of the weakening Rupee, rose 10.5 to $ 6.5 billion. But even then the trade deficit (TD) widened to $ 2.4 billion, that is projected to be “significantly above the annual estimate of $3.0 billion by end of fiscal 2005 in June this year, SPB forecasts. TD widened largely due to high prices of imported oil and increase in quantity. Other factors adding to widening of TD are larger import of machinery and chemicals.
SBP forecasts the Rupee to stay stable at current levels against all major foreign currencies. On the question of the twin objectives of growth-n-inflation, SBP vowed, “it will remain alert to the movements in key monetary and credit variables, and take corrective measures, if required to ensure price stability.” Business is booming, but rising inflation, including the critical food inflation, is overshadowing the national scene. It should be a worrying thought for Prime Minister Shaukat Aziz’s government, and President Pervez Musharraf who wish to cut poverty.
MPS warns the government on the rising food prices — something very critical in a country where, already, nearly 41 percent people live below the poverty line, and wages for the lower-to-middle class are sticky, and in fact have gone down in real terms. Food-inflation rose 14.9 percent — a historic high this summer, but now somewhat moderated, officials claim. But, at end-January, sugar is selling at a record Rs. 27 a kilo and wheat flour in major cities like Karachi, costs between Rs. 16 to 18 a kilo — another historic high. Eggs in Islamabad cost Rs. 48 a kilo, mutton is Rs. 220 to 270 a kilo, and beef Rs. 120 a kilo. SBP said, the consumer price inflation that moved around 4.0 percent for the last few years, shot up to 9.3 percent in July, 2004, declining to 8.8 percent in December due to receding food inflation. The core inflation, on the other hand, is still heading upwards, though at a slow pace, and has risen to 6.8 percent in December, 2004.