July 21, 2003	Monday	Jumadi-ul-Awwal 20, 1424

The unprecedented increase in liquidity in Pakistan are the after-effects of the 9/11 events. This increase in the liquidity has affected different sections of people differently, such as reduction in mark-up rates. The SBP has lowered its bench mark rates and now the banks may avail the discount window facility at a very low rate.

However, the situation is changing now with the central bank governor stating that investments in the T-bills and the government bonds was no more a profitable business for banks and they should look to other avenues.

This kind of finance has a limited scope as well as its own hazards. It is argued that this would give boost to manufacturing industries. But the use of these goods needs a middle class base which not only is narrow but is also shrinking due to general economic conditions, unemployment and rising inflation rate.

The main beneficiary of reduction in lending rates is the government. Its expenditure on debt servicing has reduced to a great extent. The government is availing cheap credit from the commercial banks, retiring debt of the central bank, and making drastic reduction in rates on various instruments of the National Savings Schemes (NSS). It is argued that even the present rates of the NSS are high and the government is incurring an implicit loss.

The second quarterly report of the State Bank for current financial year estimates that the borrowing of Rs100 by the government from the commercial banks for 5 years would cost Rs8.14, whereas the same through the NSS would cost Rs10.03 causing the loss of Rs1.89. The report has further estimated that in the first half of the current financial year the implicit loss due to this differential comes to about Rs1,406 million.

Therefore, if the present situation continues one may expect further reduction in the NSS rates. The second group, which has benefited from the reduction in interest rates are big businesses and upper middle class. The profit of the former has increased due to the cut in financial cost, whereas the latter is able to enjoy the luxuries of life with cheap and easy credit. The worst sufferer of this situation is the class of low income and that dependent on pensions and past savings. Bulk of the savings, both in the form of bank deposits and the NSS belong to small savers. The reduction in the interest rates has affected them seriously. Presently, the mark-up on savings deposits is not enough to cover the official inflation rate. Thus in real terms bank depositors are losing their money. Similar is the case with the NSS. The government is not only reducing interest rates but also withdrawing the implicit benefits in the form of tax exemptions etc., which is causing further reduction in the real rate of return.

The main beneficiaries of excess liquidity are the government, big businesses and upper middle class whereas the sufferers are poor and oppressed sections of the society. The immediate effect of this situation is the widening of the gulf between the haves and have-nots.

The assumption that low interest rates induce economic activity, employment, and income and ultimately benefit the poor is not valid in itself but requires the fulfilment of many other conditions which in the present scenario needs a patience and long wait.