August 08, 2007	Wednesday	Rajab 23, 1428

LAHORE, Aug 7: State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar said on Tuesday that a bankruptcy law was being drafted to allow companies to wind up their businesses, but she refused to give a timeframe for its enactment.

“Internal and external consultations on the proposed law are under way, and once the draft law is finalised, it will be sent to the parliament for approval and subsequent enactment. But I cannot give you a definitive timeframe for that,” she told Dawn after her address to businessmen at the Lahore Chamber of Commerce and Industry.

The industry, especially the struggling spinning sector, has long been demanding that the government should put together a bankruptcy law to allow loss-making companies an “honourable” mechanism for winding up their businesses on the pattern of bankruptcy law in the US.

Speaking on central bank’s monetary policy for the current financial year, she made it amply clear that the monetary policy was not “negotiable.”

She said the central bank’s monetary policy for the current fiscal year reflected a strategic change as country’s top regulator of the financial sector had not only enhanced the discount rate (the rate at which banks borrow from the central bank) by 50 percentage points but had also taken other measures to contain inflation without hurting the interests of the private sector.

She added the monetary policy has been designed to boost investment and economic growth, protect interests of the private sector and ensure price stability in the country.

She said the government had been told to restrict its borrowings because it was inflationary in nature.

She said the rupee could appreciate to new levels, which was not good for exporters or efforts made to contain inflation in the last couple of years if the central bank had not taken measures announced in the monetary policy.

Money supply had expanded at 21pc last year against the target of 10pc and sterilisation of foreign inflows increased the reserves by 10pc.

The export refinance and subsidies – R&D grant LTF scheme, etc – given to the textile sector accounted for more than one- third of the monetary expansion.

“The situation on the ground demanded that we increase discount rate by 150-200 percentage points for successfully attaining the inflation target of 6.5pc for this year, which would have hurt exporters hard. But we decided to raise the discount rate by only 50 percentage points,” Dr Shamshad said.

Instead, she said, the central bank chose to take other initiatives for price stability. These included modifications in export refinance distribution to ensure minimal raise in the discount rate.

The new export refinance scheme binds banks to mobilise 30pc of resources to be distributed under it with their own efforts as the central bank will contribute 70pc of the total amount to be lent under the scheme.

The central bank provides resources to banks for export refinance at 6.5pc for lending to exporters at 7.5pc.

She said three factors had made the central bank to modify the export refinance scheme: falling or stagnant domestic saving rate, misuse of refinance and low deposit rates offered by the commercial banks.

She said banks had distributed record export refinance last financial year, but the country’s exports did not increase commensurately.

It indicated that some exporters had been misusing the facility meant for export in non-productive sectors, like real estate and mutual funds.

She said if the central bank had not increased its discount rate, it would have to raise the same by 200 percentage points after two months or so. That would have been a very bad news for the exporters, she said.

She said increase in the discount rate would not make an impact on banks interest rates. Nor would the changes made in the export refinance scheme reduce supply of credit, including export refinance, to the private sector.

She said the banks had been instructed to increase lending to the private sector.

Initial reaction, she admitted, to the changes in the discount rates and export refinance arrangement was of panic. But, she said, the banks were flushed with excess liquidity at present that would ultimately have to lower their lending rates.

But she warned that lending rates were ultimately hinged on the demand and supply situation, borrowers’ credit worthiness and risk involved in a particular project.

Dr Shamshad claimed that the central bank’s monetary policy for the last financial year had produced positive results, especially in stabilising prices.

She said the core Consumer Price Index (CPI) came down to 5.1pc in 2007 from 7.8pc in October 2005.

“That clearly shows the success of the monetary policy,” she said. Besides, it also helped weaken the import demand pressures, contributing to bringing the external current account deficit under control.

At a separate meeting with the members of the All-Pakistan Textile Mills Association (Aptma), she told them to make efforts to become competitive for global competition.

She rejected the spinners’ demand for subsidy on the interest rates.

She said the 3pc subsidy on interest rate on long-term finance would become effective from Sept 1 for which modalities are being worked out.