Higher monetary targets set for FY07: NCCC gets new name, status
By Shahid Iqbal KARACHI, July 4: While the State Bank has decided to continue with tight monetary policy during the current fiscal year, it has also changed the name, status and role of the National Credit Consultative Council (NCCC), formed 34 years ago.
The NCCC in its annual meeting held here on Tuesday, with SBP Governor Dr Shamshad Akhtar in the chair, expressed concerns over the government’s fiscal expansion in 2006-07 and observed that huge liquidity outflow in the form of government borrowing from the banking system would produce liquidity crunch.
The SBP governor proposed to change the name of the NCCC as Private Sector Credit Advisory Council (PSCAC) whose role should be to explore the credit needs of the private sector and ensure that those credit needs ere appropriately met. The council endorsed the proposal.
She said that the NCCC had been constituted in 1972 to ensure optimal utilisation of bank credit through the process of directed credit to various sectors. “Now the ongoing financial sector reforms have virtually led to the stoppage of all directed and subsidised credit and that the credit planning process is completely market-based, it is appropriate to change the status of NCCC,” she explained.
The council reviewed the monetary and credit developments during the last fiscal year and proposed the Credit Plan for the current fiscal year, which would be approved by the SBP Central Board of Directors at its meeting on Thursday.
The SBP governor said that the targets under the credit plan should be treated as minimum requirements to support economic growth.
The credit plan envisages the broad money to grow by 13.5pc (Rs459.9bn) based on the GDP growth target of 7pc and the inflation target of 6.5pc set for the current fiscal year. The monetary growth target for previous year was 12.8pc (Rs380bn).
The NDA of the banking system is expected to expand by Rs450.1bn this year while the last year’s NDA target was Rs365bn.
The NFA of the banking system is projected to rise by Rs9.8bn against the previous year’s target of Rs15bn.
In line with the budget, the government sector is estimated to absorb bank credit to the extent of Rs130.1bn (Rs120.1bn for budgetary support and Rs10bn for commodity operations).
Last year, the target for government sector borrowing was kept as Rs120bn (Rs98bn for budgetary support and Rs20bn for commodity operations).Credit to private sector has been substantially increased for the new fiscal and the council estimated it at Rs390bn. Last year credit to private sector was kept at Rs330 billion but the private sector off-take went far beyond the target.
The council expressed its concern that the liquidity position would remain tight due to large recourse of the government from the banking system, given the fiscal expansion anticipated for 2006-07.
Dr Akhtar said that the SBP would strive to meet the challenge of maintaining price stability in the current fiscal.
She asked the Pakistan Banks Association for its assistance in bringing down the spread between the lending and deposit rates for the benefit of small depositors.
Banks have been facing serious criticism that they kept much than what they return to the depositors and this practice made them able to show record profits for a couple of years.
She also stressed for stretching the maturity of deposits to create room for long-term project financing.
The SBP governor has, in principle, agreed to (i) set up an Infrastructure Task Force to help improve the financing to meet the growing requirements of the economy; (ii) examine the feasibility of allowing the refinance facility on Islamic Banking principles. The council was of the view that provincial governments should lower the stamp duty which is levied on corporate debt papers and securitisation. It also proposed the provision of data on provincial distribution of industrial credit and recommended for enhancement of credit to SME sector in order to alleviate poverty.
The meeting was attended among others by SBP Economic Adviser Riaz Riazuddin, Executive Director Jameel Ahmed, Director Economic Policy Department Dr Aftab Nadeem, presidents of commercial banks, representatives of the federal and provincial governments and chambers of commerce and industries and agriculture.
Sabihuddin Ghausi adds: Meanwhile, leaders of textile industry raised again the issue of swapping their outstanding loans with the State Bank of Pakistan’s special scheme Long Term Financing—Export Oriented Units (LTF-EOU) and a reduction in Export Refinance Scheme during the NCCC meeting.
“Financial cost is now 3.79pc of our sales and in addition there is 1.5pc levies on textile export sales,” said Mirza Ikhtiar Baig, who represented the Federation of Pakistan Chamber of Commerce and Industry at the meeting. “The textile industry operates on 4 to 5pc margin and after recent increase in interest rates it is now under serious stress of mounting financial cost.”
Baig’s contention was that the interest rates had gone up from 4-5pc in 2002-03 to 10-11pc at present while the export refinance was now being offered at 9pc. Add to this financial cost, the rising cost of other inputs has made textile business unviable.Another issue taken up for discussion in the meeting was banks’ assistance for the Small and Medium Enterprises (SMEs). The banks, according to Mr Baig, still insist on collateral for extending loans rather than relying on cash flow of the project.
