ISLAMABAD, 14 July 2003 — Prospects of commercial banks’ profitability have improved as a result of larger projected business turnover and continuation of an easy monetary policy.
Commercial bankers and the central bank that were apprehending a profitability slippage during the fiscal 2004 that started July 1, now seem upbeat. Greater use of liquidity lying idle with banks will spur profitability and boost economy, that in turn will help expand the financial sector. The central bank also has just announced permission to commercial banks to advance rupee credit and overdraft facilities to foreigners doing business in Pakistan. Credit demand for imported machinery and capital goods now is increasing rapidly as a wide range of industries are now engaged in upgrading, modernization and expansion, particularly to meet the challenges of the WTO that is merely 18 months away.
It could not be done in the past because the cost of credit was prohibitive, with bank lending rate, only four years ago, being 22 percent. Now the interest rates are down to an attractive four percent, or even lower, encouraging the business and industry to invest more in plant and machinery. Low interest rates will continue in the foreseeable future, according to all banking industry forecast, and the central bank itself.
Bank credit advanced to the textile industry in 2003 alone was Rs.32 billion, up from just Rs.9.0 billion in 2002.
This industry also has imported sophisticated textile machinery worth more than $2.0 billion from Germany, Italy, Japan and China over the last three years, as it gears to face WTO’s quota-less world from January 2005. The emphasis of this industry is on value-added production in order to get better unit prices and raise the export volume in the global market place. Textile exports account for more than 65 percent of overall Pakistani exports. “The overall credit demand from the textile industry alone will cross all previous limits,” according to the National Credit Consultative Committee (NCCC) that annually lays down the credit and monetary targets, forecasts. But, credit demand from engineering, wool, jute, mining, beverages, tobacco, carpets, rugs, and ship-breaking, declined in 2003.
The State Bank of Pakistan (SBP), the central bank, attributes it to manufacturers’ “failure to benefit from declining lending rates and lack of aggressive marketing.” There are two reasons for banks’ profitability and business to expand: SBP has just set a target of Rs.230 billion for monetary expansion in fiscal 2004 — 11 percent of GDP, but, in fact, it is likely to rise. It will be contributed by expansion of Rs.130 billion 9 in net foreign assets (NFA) and net domestic assets (NDA) of the banking system by Rs.100 billion. This expansion is aimed at achieving a GDP growth of 5.3 percent, while keeping the inflation rate at 4.0 percent.
The expansion and larger lending will benefit the private business. The other reason is the SBP’s key declaration that it will continue with its easy money policy. It is meant to assist strengthening of the current signs of recovery of the economy after a prolonged sluggishness.
These trends are visible in the monetary and financial sector developments, too. The bank lending to the private business and industry, described by SPB as “the most notable credit development” in 2003, for instance, rose to Rs.138.6 billion, compared to just Rs.33.8 billion in fiscal 2002.
The total monetary expansion in 2003 was due to “accumulation of NFA of the banking system to the level of Rs.300.5 billion. It resulted from increased foreign inflows and a building of forex reserves to over $10.726 billion which will go a long way in restoring investors confidence, improving Pakistan’s credit rating and attracting foreign investment,” NCCC said. NFA included $3.88 billion of overseas Pakistani workers’ remittances from the Gulf, Saudi Arabia and North America, $740 million foreign direct investment (FDI) and assistance from international financial institutions. SBP, during 2003, purchased $4.81 billion of home remittances to build up its forex reserves.
The purchase also helped SBP to contain appreciation of the rupee to 3.9 percent against the greenback in 2003 in order to enable exports stay competitive internationally. Rupee had appreciated 6.8 percent in fiscal 2002.
The NCCC has approved a monetary expansion of Rs.230 billion that is 11 percent of the GDP in order to achieve a growth of 5.3 percent for fiscal 2004 that started July 1, and an inflation rate of 4.0 percent. The NCCC decisions announced by SBP project the NFA of the banking sector at Rs.130 billion, while the domestic net assets (DNA) will expand by Rs.100 billion in 2004.
The government borrowing from the banks to meet its budgetary deficit is placed at Rs.15 billion. But, the government will retire Rs.6.0 billion that it had borrowed for commodity purchases.
