PAKISTAN, HISTORICALLY is a capital-starved economy. National savings rate of 13 per cent in the fiscal year 2001 is symbolic of the saving shortage as compared to the fast growing economies like China and Malaysia, where the rates average between 30-40 per cent.

This capital shortage has not only constrained the economic growth, — low investment rates of around 15 per cent of the GNP — but has also led to an accumulation of $36 billion in external debt which is 64 per cent of the GDP. As gross investment grows to higher levels in future reliance on external resource, inflows would increase if the national savings rate starts to improve.

The government’s 10-year perspective development plan 2001-11 envisages a GDP growth rate of 5 per cent per annum by 2004. The first three years of the plan, project a total investment of Rs1,979 billion (Rs660 billion per year) of which Rs460 billion will be in public sector, and Rs1519 billion in private sector. The plan conjures a net external resource inflow of Rs163 billion and the remaining amount of Rs1816 billion to be financed from the domestic savings. Thus external flows are expected to finance around 8 per cent of the investment, and the national savings will contribute about 92 per cent. This is quite ambitious, given the recent past when external resources contributed around 20 per cent of the financing towards gross investment. If domestic resource mobilization has to be improved, the banking sector will have to play an enhanced role of resource mobilization and resource allocation to ensure that the economy’s fund requirements are met.

To get an idea of the financial deepening of the economy and the size of the banking system, the contribution of bank advances in the overall investment can be estimated. The net advances of the scheduled banks have gone up from Rs508 billion in FY 1996 to Rs873 billion in FY 2001. Over the same time period, Bills purchased and discounted by the banking system increased from Rs47.2 billion to Rs64.6 billion. Therefore, bank advances and bills discounted have an average growth of around Rs76.5 billion per year over the last five years. This is roughly 12 per cent of the yearly gross investment envisaged above. Thus, it can be seen that the growth in bank advances is going to fund a small percentage of the total gross investment requirements of Rs660 billion, per year. This is an indicator of the low level of development of the financial sector in Pakistan.

From the private sector perspective, if we look at the domestic credit expansion over the last few years and its allocations, the picture becomes clearer.

The first point to note in Table 1 is the increase in credit to private sector from Rs62.1 billion in FY 1997 to Rs105 billion in FY 1999. Following the crackdown on bank defaulters, and the tax survey, the growth in private sector credit plummeted to Rs23.1 billion in FY 2000, and only partially recovered to Rs61.3 billion in FY 2001. As business confidence recovers the credit offtake should resume its trends prior to FY 2000.

The second point to note is the share of the autonomous bodies which is controlled under the IMF programme and has not exhibited any explosive tendencies. The share of autonomous bodies in the increase of the bank credit in FY 2001 was Rs7.4 billion from a total growth of Rs53 billion in domestic credit expansion. The autonomous bodies included WAPDA, the KESC, the OGDC, the gas companies, the Pakistan Telecommunications Corporation and the Pakistan Railways. The autonomous bodies have restricted the access to banking system to protect the interests of domestic private sector, and they have to generate their own resources through internal generation, foreign borrowing or tapping the capital markets directly.

Finally, in FY 2001 the government sector also reduced its borrowings by Rs47 billion, whereas the private sector increased its borrowings by Rs54 billion. Thus, the strategy is to create more room for private sector in bank credit. As of FY 2001, private sector accounted for 71 per cent of all bank advances, the public sector enterprises had 10 per cent, the government had 9 per cent, and the personal loans amounted to 9 per cent of the total. The good news is that it seems that the private sector financing needs are going to be the main market for bank credit, the not so good news is that the amount of bank credit is not going to be sufficient to fully satisfy the private sector. The banking system role as an allocator of resources is highly biased in favour of the urbanized economy and geared to serving the needs of the larger corporate customer. The centralized banking system has largely ignored rural credit or the SME credit, which remains a very small component of its overall credit portfolio.

Thus large segments of the economy remain outside its coverage. The growth of the banking sector is also being curtailed by the presence of the National Saving Schemes through which the government is siphoning off the long-term funds in the country. It is estimated that the government mops up roughly Rs150 to Rs200 billion per year through the National Saving Schemes and its other financial instruments, an amount far larger than the credit created through the banking system. While the government may protect private sector share of the domestic banking credit by restricting the public sector borrowing from the banking system, it will continue to dominate the non-banking money and the capital markets through its saving schemes.

If the banking industry has to play a meaningful role in industrial development, it has to expand its coverage to all sectors of the economy, both rural and urban. It also has to develop procedures to cost effectively, serve the small and medium enterprises which are expected to play the dominant role in our development, and create jobs. The scope for the expansion of banking industry is unlimited provided it innovates and creates new sources of investment for the national development.