These moves range from the State Bank of Pakistan’s (SBP) discount rate cut to new the letter of credit facilities for those engaged in foreign trade, and the central bank’s decision to allow commercial banks enter into collaboration with foreign banks for the sale of their financial products.

While the commercial banks may, or may not, be slowly coming out of a prolonged period of inactivity, the SBP has virtually thrown them a new challenge— it has further reduced the discount rate. The central bank’s decision to lower the discount rate by 1.5 from 9.0 to 7.5 per cent aims at enabling commercial banks to lower their own lending rates.

The central bank announcement said: “It has been decided to further reduce the minimum rate of return to be paid by recipients of financing facilities from the SBP for meeting temporary liquidity shortages and the SBP’s 3-day repo facility.” The new rate, on an annual basis, effective November 18 will be for the SBP’s liquidity facility against the government’s market treasury bills and the Pakistan Investment Bonds (PIB).

It would have been still better for the SBP to announce the discount rate cut in early September to help borrowers at the start of the seasonal credit demand that remains strong during the entire winter, and spreads upto March next year.

While the central bank was gradually lowering the discount rate from 14 to 7.5 per cent in order to ease the monetary situation and reverse the squeeze in order to let the economy breathe, the virtual villains of the peace have been the commercial banks. They persistently, and I will say, stubbornly,resisted the SBP and thwarted its comparatively easy-money policy.

They either entirely ignored the SBP signals, or lowered the >lending rate only fractionally, half-heartedly. In spite of all the SBP’s rate-cutting from 14 to 9 on January 22 this year, and to 7.5 per cent, the banks’ lending rate, so for, has declined, an eye-wash 0.62 per cent. The average lending rates has stayed 13.12 per cent. But even then while the blue-chip customers do get a preferential treatment, a vast majority of borrowers still have to pay much higher rates—and not the average.

An interest rate of even 18 per cent is not unheard off, even now. The credit pictures confirms it. Fiscal 2002 saw only Rs30 billion lending to the private sector while, even the modest credit target for the year was Rs98 billion. The bankers, I talked to, admit that credit disbursement even in the first five months —July-November—of the current fiscal 2003, is “quite poor”. The potential needs of the private sector are much higher than Rs98 billion (b) target fort 2002, if the present squeeze on the economy is eased. The result was the SBP’s good intentions did not impact the business, industry and other credit-starved sectors including working capital.

The long-term funding for new investment and upgradation and modernizattion of Pakistan’s woefully outdated and obsolete industry is a far cry. It is nowhere on the horizon as year 2002 is moving towards its close. Is this the way for our industry, >business and exports to enter the post-2004 world of WTO regime, despite the country’s grand plans that stay merely on paper?

The banks, repeatedly, have failed to respond on this crucial front and the SBP has been unable to show results on a follow through action over implementation of its own policies. It may be partially correct for the SBP Governor Dr. Ishrat Hussain to say that the central bank cannot force the commercial banks to slash the lending rates, but then who, among the country’s economic managers, including the mighty Ministry of Finance, can bring the bank bosses around? Who is minding the store?

The first comments of big bankers, including those belonging to the state-owned banks—the most difficult to mend— to the discount rate reduction, confirm this attitude. They, if they had to reduce the rate, are thinking in terms of around one per cent or less — and that too after one to three months. Will that impact the economy at all? Will it not mean one more good >initiative of SBP going astray?

This first rate cut of fiscal 2003, follows only days after the SBP annual report for fiscal 2002, in which it said: “the increase in Rupee liquidity fuelled the exceptional 14.8 per cent growth in M2. This allowed a substantial expansion of the banks’ >deposit base, but net private sector credit demand did not grow correspondingly, the funding requirement of the government from the scheduled banks fell due to higher availability of non-bank finance in FY02, and banks demonstrated an apparent preference for less risky assets.” It allowed the government to substitute its accumulated borrowings from the SBP with higher net rpt net borrowings from scheduled banks without putting upward pressure on interest rates. How far, is the situation going to change in the wake of the latest SBP decision?

The discount rate reduction may hold a slim hope for the borrowers, but it is positively a bad news for the savers. The banks, as habituals of taking the easy line, and adopting soft but cruel options, are already planning to reduce the ridiculously low deposit rates for savers still further to make good for any lending rate cut. How will it impact the already woefully low level of national savings? How will it effect the livelihood of savers whose only means of survival is their savings? How will it effect National Savings Schemes (NSS) that have constantly attracted the wrath of this pro-bank government, and a pro-bank SBP? The mighty bankers lobby has, over the years, repeatedly succeeded in hoodwinking Finance Minister Shaukat Aziz, the government and Dr. Ishrat Hussain in forcing their hand to plough into NSS rates and got them drastically down, on the pretext of providing them with “a level playing field against the NSS.”

This level playing field has been provided to banks, but have they enchased it? Have they improved themselves. Have their lending rates declined? Or profit on deposits improved? Doesn’t the remedy for the much-accumulated ills and sins of the banking industry lie in putting their own house in order instead of punishing the voiceless NSS savers who, despite being in lakhs, have no lobby to plead their genuine case. The government is a party—and a beneficiary—in this NSS rate cut scam because it is enabling it to reduce its own cost of domestic debts. This is in spite the fact that it is innocently pretending only to be providing “ a level playing field” to banks against once “high profit” rates of the NSS.

On another count, businessmen and people engaged in foreign trade have been provided credit facility in the form of permission for substitution of the contracts and letters of credit for a maximum 180 days from the date of disbursement of credit to importers and exporters under a foreign exchange circular 25. SBP said, “the settlement or execution of the last substituted contract or letters of credit should not extend beyond six months from the date of disbursement of the loan.” The decision will provide more flexibility to those engaged in foreign trade in dealing with their foreign trading partners because, following 9/11 the later are forcing their own terms. Bankers hope that the SBP decision will help save considerable forex for the country.

Yet another SBP moves allows Pakistani banks and financial institutions to collaborate with foreign banks to provide their “branded financial products or financial services” in this country. The products can be offered within the area of authorised business of Pakistani banking companies. The decision will help open Pakistani banks to foreign financial sector investors. It should improve the profitability of Pakistani banks and help them import modern banking technology. These are some of the good initiatives. one has to watch out how far, and when, will Pakistani business, industry and foreign trade—start enjoying their benefits.