May 15, 2006	Monday	Rabi-us-Sani 16, 1427

THE official statistics depict a marked improvement in various sectors of the economy in the fiscal 2004-05 (FY-05). But the current year 2005-06 (FY-06) seems to be leaning towards visible deceleration. The GDP growth is forecast to come down from 8.4 per cent in FY-05 to 6.3-6.8 per cent.

Besides, there is an unprecedented deficit of $3.4 billion in the current account during the first seven months of the current fiscal constituting 36.8 per cent of the foreign reserves held by the SBP on December 31, 2005. The gap between savings and investment is also growing sharply.

The SBP seems worried not only about the savings/investment imbalance but also at the disappointing level of savings and the low level of investment. The SBP has accordingly suggested in the second quarterly report for FY-06 (H1-FY-06) that the savings should be encouraged by bringing real return on deposits positive or above the on-going inflation rate.

The house-hold savings form bulk of the overall national savings. As is evident from table 2.36 page 54 of the SBP annual report for FY-05, there has been a sharp decline in these savings from 13.2 per cent in 2003-04(FY-04) to 10.8 of the GDP in FY-05- i.e. 2.4 per cent of the GDP.

The gross total investment during FY-05 has been estimated at 16.8 per cent of the GDP. This widens the household savings/ investment gap to six per cent of the GDP which is very substantial.

The questions raised are: what should be the investment rate to sustain targeted annual real GDP growth. There seems to be no hard and fast rule but it is generally believed that to sustain 6-8 per cent annual growth, investment of about 20 per cent of the GDP, as distinct from the investments received from the privatization of the public sector enterprises, is necessary.

To be self-sustaining, we need to create environment in which not only the people are willing to save but also possess the propensity to save up to the desired level. If this is not done, government will have to resort to borrowing internally and externally to meet the investment requirements.

Then again the question will arise: Will it be desirable to resort to large-scale borrowing when the country is currently highly indebted “in the absolute term” when compared to October,1999 when General Musharraf took over.

As stated in the SBP report for H1-FY-06, the savers should be given a positive return on their savings. The banking sector is giving a raw deal to their depositors. In this connection, a table is appended showing the current interest rates which the major domestic banks, small local banks and a few foreign banks are paying to the savings bank account holders:

As pointed out in the SBP’s monetary policy statement for January-June,2006 (MPS), the bankers’ lending/deposit spread was around seven per cent. The ministry of finance issued in early March, 2006 shows that around mid-2003, the banks’ spread had come down to 3-4 per cent. Even at that spread, the overall banking sector did not suffer any loss but made profits.

Since early 2005, SBP is tightening the monetary policy and the banks are almost doubling their profits. They can conveniently reduce their spreads by say-at least minus four per cent per annum [by increasing the lending rate by two per cent per annum or so] to give better deal to the depositors by bringing deposit rates at least nearer to the inflation rate, though it may result in minor dent in their unprecedented profits. The banks will also have to reduce their non-performing loans by ensuring speedy regularization/recovery.

But the question is: will the SBP bell the cat to rescue the depositors? Perhaps no. And why the banks are taking almost cost free deposits? It is because of the anti-laundering measures taken by the American and other governments in post-9/11 period which choked the havala/hundi system and flow of remittances channellised through official banking channels began which over-filled the banks’ coffers and they did not have investment avenues.

It was high time that the SBP should have come up with a rationale interest rate structure and the government should also have chalked out policies to open up productive channels but they failed.

The SBP rather intentionally allowed the interest rates to fall and acted more as a proactive implementer of the fiscal rather than monetary policy by selling government Treasury bills to the banks at the minimal rate with a view to lowering the government’s expenditure in order to bring down the fiscal deficit. SBP is also believed to have been instrumental in getting the interest rates on National Savings Scheme (NSS) instruments reduced by half. These measures induced the banks to sharply cut the deposit rates.

The SBP got second opportunity to safeguard the depositors’ interest in 2005 when it started tightening the monetary policy but at that time too, the regulator remained inactive and let the banks do whatever they liked which made the banks bold to give a very raw deal to the depositors. It appears that the banks currently have a lot of money and they for the time being, just do not need mobilization of deposits.

If the government really needs to promote industrial/infra-structure development, it should create large-sized “investment banks” mobilizing long term deposits and lending to the projects on long-term basis. The commercial banks should remain confined to short-term deposits/lending. Investment banks are very small and are not equipped financially or otherwise to do the real job.

Another important reason for reduction in the savings is that the persistent inflation has eroded the purchasing power of the general public. The inflation rates as picked up from the SBP annual reports are as follows: 1999-2000 5.7 per cent, 2000-01 4.4 per cent, 2001-02 3.5 per cent, 2002-03 3.1 per cent, 2003-04 4.6 per cent, 2004-05 9.3 per cent and 2005-06 [up to December 31,2005] 8.5 per cent.

If one takes into account the cumulative impact of these inflation rates, the purchasing power of Rs100 as on the 30th June,1999 stands so substantially eroded that the commodities which Rs100 could purchase in June,1999 required Rs146 in December,2005.

Apart from improving the interest rate structure, not only at the banks’ level- but also by the National Savings Organization, there is also an urgent need to really lower the inflation with a view to restoring the purchasing power of the consumer.

Apart from that, equitable and fair distribution of the income and assets has also become long over-due which no government is paying heed to. Unless the propensity to save of the common man is increased through these measures, the expectation to increase the domestic savings will merely be a pipe dream.

Yet another wrong policy pursued since 9/11 is that of increasing the GDP growth through consumerism by providing loans for the purchase of cars and consumer durables. Does consumerism induce compulsory savings? No. It just does the opposite as down payments have to be made by the customers for availing of bank credit for these purposes.

The consumer is thus currently spending his present savings [for down payments] and future savings [ in repayment of the instalments of the principal and interest] for making ready purchases of consumer durables. This policy has already and will ruin the prospects of domestic savings in future thereby dampening the chances of raising savings for investment in coming years adversely affecting the prospects of a self-reliant economic growth.

The impact of the consumerism can be gauged from the fact that the private consumption expenditure during FY-01, FY-02 and FY-03 aggregated 2.5 per cent of the GDP while in FY-04 and FY-05 it has multiplied by ten times to 25 per cent of the GDP ( P9 of the Statistical Annexure to SBP annual report for FY-05).

It may be added that the world over, the growth in the financial sector and the consumption-led growth are not the real engine of growth. It is the production-oriented growth in agriculture and industry – as distinct from the assembly of vehicles and other consumer durables- that provides base for the sustained economic growth.

Apart from the above reasons, consumerism is also responsible for decline in savings and rise in inflation and the time has come to review the present policies.