A challenge of Himalayan proportions

Updated June 29, 2020

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The central bank believes that the recent rate cut will lead to an increased intake of cheaper credit immediately — from early July. — File
The central bank believes that the recent rate cut will lead to an increased intake of cheaper credit immediately — from early July. — File

STEERING the economy out of recession in the new fiscal year is a big challenge. An associated and even bigger challenge is to keep unemployment from rising too fast and too high.

The federal government has set a growth target of two per cent for 2020-21 and admits that the country’s economy shrank 0.4pc in 2019-20. Eminent independent economists Hafiz Pasha and Shahid Kardar warn that post-pandemic unemployment could rise as high as 16pc for Punjab, 15pc for Sindh, 14.5pc for Khyber Pakhtunkhwa and 9pc for Balochistan. The Pakistan Institute of Development Economics estimates that in Punjab alone 10 million to 12m people could lose their jobs.

The International Monetary Fund (IMF) has projected a scary 4.9pc global recession, which may have huge negative consequences for our external sector. Prime Minister Imran Khan says Covid-19 cases may peak in July-August, which means greater stress on fiscal resources and more restricted economic activity.

It is in this backdrop that the State Bank of Pakistan (SBP) cut its key policy rate by another 100 basis points on June 25, bringing the total easing to 625 basis points since mid-March. The central bank’s policy rate now stands at 7pc, down from 13.25pc. The central bank said in a press release on June 25 the priority of its monetary policy had “appropriately shifted toward supporting growth and employment during these challenging times”. A softer inflation outlook did encourage the central bank to go for the latest rate cut. The SBP says the 2020-21 budget “is also expected to be neutral for inflation,” meaning it could neither contribute to inflationary pressures nor suppress them.

Whether the latest interest rate cut will lead to accelerated private-sector borrowing from banks remains unsure

“The Monetary Policy Committee noted that with approximately Rs3.3 trillion worth of loans due to be re-priced by early July 2020, this was an opportune moment to take action from a monetary policy transmission perspective.” Translated in plainer words, the central bank believes that the recent rate cut will lead to an increased intake of cheaper credit immediately — from early July — simply because that will be the time for maturity of Rs3.3tr debt taken previously at high rates. Since much of that loan waiting to be re-priced is owned by the government, its borrowing from banks will increase sufficiently, helping it meet its fiscal requirements.

But whether the latest rate cut, just days ahead of the re-pricing of a huge stock of bank debts, would also lead to accelerated private-sector borrowing from banks remains unsure. That depends on several factors, including how fast the demand for private-sector credit picks up and whether banks actually go for faster private-sector lending at a time when the borrowing demand from the government would be still high.

A cut of massive 525 basis points in the interest rate (before the latest reduction of 100 basis points) failed to increase net private-sector lending by banks. Banks’ net lending to the private sector between July 1, 2019, and June 12 slumped to just Rs195 billion from about Rs607bn a year ago.

Meanwhile, the SBP has come up with its first periodical report on concessional loaning scheme “for SMEs and corporates” to help them save jobs. But only time will tell how many jobs the scheme can actually protect and how that contributes towards the targeted 2pc economic growth rate in the next fiscal year. As of June 12, banks had approved 991 loan applications for Rs107.5bn concessional finance under SBP Rozgar Re-finance Scheme launched on May 6.

The SBP’s progress report says that these applications included requests for Rs23.5bn financing by SMEs and “small corporates”. Full disbursement of the entire amount of Rs107.5bn concessional finance (at the subsidised annual interest rate of 3pc) should help save 212,327 jobs. The numbers are obviously very small, but the initiation of the scheme and its close monitoring by the central bank are, nonetheless, commendable. Up to June 12, 22 banks had reported approval of loan applications for concessional finance (worth Rs23.5bn) for SMEs and small corporates under the SBP Rozgar Finance.

But their performance varied: only seven banks were able to approve 70pc-93pc of the loan applications received by them. For the remaining 15 banks, this percentage was lower — in one case, just 9pc. Clearly, banks need to develop their capability for processing loan applications of SMEs and small corporates. Going forward, they will also have to improve internal processes to ensure uninterrupted disbursement of funds to SMEs and companies to help them retain jobs of their employees. For the purpose of the Rozgar scheme, the SBP defines SMEs and small corporates as those with annual turnovers not exceeding Rs2bn.

The SBP has so far not shared details of banks’ performance regarding concessional loan applications approved by them for large corporates under Rozgar scheme except the fact that the approved applications are worth Rs84bn. One can hope that in due course of time the central bank would make those details public.

Concessional financing to SMEs and small and large corporates to help them retain their employees amidst declining business and pick up their initial losses up to 40pc is apparently a good scheme. But its implementation in letter and spirit and the overall business environment in the country would determine its success.

The very fact that banks have so far approved less than 1,000 loan applications of SMEs and small corporates shows there is a need to ensure filing, processing and approvals of a larger number of applications to make the scheme successful in terms of revitalising small businesses.

The output of large-scale manufacturing (LSM) recorded a massive 41.89pc yearly decline in April this year. And, the cumulative decline in LSM production in July-April is 8.96pc. So, a planned channelling of concessional funds worth Rs84bn towards large corporates seems justified. But the sectoral distribution matters most.

If loan applications of large corporates approved by banks belong to labour-intensive industries like construction, textile, food, automobile, iron and steel and electronics, perhaps the purpose of concessional lending would be served better. —MA

Published in Dawn, The Business and Finance Weekly, June 29th, 2020