Growth & lending rates

DESPITE the fact that the present international environment is highly favourable for Pakistan, private foreign investment continues to be shy. The main reason for this is the continued lack of interest on the part of domestic investors. Investment activity in the country has not yet picked up. This is obvious from the fact that during the last two years not more than a couple of listings have taken place at the bourses. There are several reasons for it but a major negative factor is the high rate of interest, investment in Pakistan being mainly loan-based and corporate savings being too meagre. Bank rates thus constitute a significant element of cost in setting up business units, be they industrial, commercial or service-related. The finance minister and the governor of the State Bank have for some time been asking the banks to reduce their lending rates but with no success. Now President Pervez Musharraf has added his own plea to the demand. Speaking to a group of businessmen on Thursday, he said that interest rates would have to be cut to promote investment. The State Bank and the ministry of finance, he said, were looking into the question as reduction was vital to ensure increased economic activity in the private sector.

The State Bank has been stressing the importance of lower credit rates and itself started relaxing the high interest rate policy when it got freed from the shackles of the IMF conditionalities following the expiry of the standby arrangement in September last, which provided for a regime of tight money and favoured stabilization rather than growth. The IMF was unconcerned with lack of investment. Until recently the banks had been arguing that since the interest rates of the national savings instruments were high, they too had to keep deposit rates high and, consequently, the lending rates had to be high. The government started reducing borrowing rates. Interest rates on national savings instruments have been reduced by 4 to 6 per cent. Rates of other instruments have also been lowered substantially. During the last six months the discount rate has been cut four times. These reductions did not prompt the banks to follow suit. Even the nationalized commercial banks which account for nearly 70 per cent of the lending did not lower the rates to the desired level. According to the State Bank, the prevailing weighted average interest rate for lending is around 14 per cent which is very high compared to most other countries which have single-digit rates. This makes it difficult for Pakistani goods to compete in the world market.

The main reason why the banks find it difficult to lower the lending rates is the large portfolio of non-performing loans which is said to have risen to Rs 300 billion. Another reason is the intermediation cost which is very high compared to international standards. While the weighted average rate for deposits is 5.5 per cent, the weighted average for lending is 14 per cent, leaving the banking spread of over 8 per cent. This shows that even allowing for non-performing loans, there is still room for a substantial cut in lending rates provided banking operations are made efficient and cost-effective. The State Bank’s goal of 10 per cent is realistic and achievable. The managements of the banks should work for increased profits through the expansion of business and investment which will stimulate economic and business activity, thereby creating a larger demand for credit and ensuring higher profits for banks.

FATA’s strange logic

SOMETHING seems to be terribly wrong with the way WAPDA and the NWFP government go about making sure that electricity consumers in the Federally Administered Tribal Areas (FATA) pay their bills. Compared to domestic and industrial consumers in the settled areas of the province where as much as 95 per cent of the total cost of supplying electricity is recovered, in FATA the utility recovers a mere three per cent of the cost of the power supplied. What makes this even more ridiculous is that electricity in FATA costs a third less than what it does in, say, Peshawar. Despite that, the utility is losing Rs 4.5 billion every year on this account.

Those who live in FATA often hide behind the excuse that they will not pay for power until the government promises to develop the region. This is bad logic because development of infrastructure and provision of services to any backward area is not possible unless residents pay their dues. In any case, WAPDA charges its consumers in FATA a substantially lower price, so there really is no excuse for them not to pay their bills. There is also a paradox here. People in FATA want their region to be treated at par with the rest of country. So, like people in other parts of the country they demand better roads, sanitation, health and education. But when it comes to paying for all of this they want to have none of it. Unfortunately, this is hardly the way to press the area’s demand for development. Electricity users in FATA must be told — and perhaps a deadline can be set for this — that they will not be provided any power unless they pay up.

Low-income housing

THE decision by the Sindh Katchi Abadis Authority to launch new residential schemes for low-income groups is a small but welcome step towards solving the acute housing problem in the province. The Authority intends to follow the pattern of the innovative Khuda ki Busti scheme, which allotted small and inexpensive pieces of land to the most needy. The SKAA intends to purchase affordable land throughout the province and provide cheap plots to the homeless. As the Authority’s Director-general Tasneem Siddiqui argued, the provision of such land will help control the mushroom growth of illegal katchi abadis. There is a massive gap between the demand and availability of low-cost housing across the country. It is this absence of affordable housing for the poor that forces them to either squat on available land or approach professional land-grabbers to provide them with land for housing. The traditional housing colonies in the public sector are unable to cater to the needs of the very poor. Plots and houses in such schemes are often bought by the relatively well off for reasons of profit. According to Tasneem Siddiqui, in Karachi alone there are as many as 200,000 vacant plots whose owners have simply decided to hold on to them until prices rise substantially. One way to prevent professional groups from holding on to plots over long periods is to substantially increase the penalty for non-occupancy. In the Khuda ki Busti scheme, speculation of this nature was discouraged through strict transparency in allotments and the condition that building on the plot would begin within a stipulated period of time. In that way, only the most needy, rather than speculators, could lay claim to the cheap plots. The government must encourage such modest schemes rather than pouring millions into low-cost housing colonies in which the influential and better off usually enrich themselves at the cost of the poor.