The PTI-government has accorded a high priority to develop long-neglected labour-intensive sectors, generate more job opportunities, speed up documentation of the informal sector and raise tax revenues.
Much of the effort is focused on providing access to subsidised bank credit to sectors such as small- and medium-sized enterprises (SMEs) (including self-employment of youth) and housing and related construction industry. The latest move is to provide collateral-free loans worth Rs60 billion to SMEs over the next three years.
The SMEs are largely in the informal sector surviving on work or craft skills with very little or no tangible assets to offer as collateral sought by lenders to advance loans.
In the last five years (2016-2020), the loans by banks to SMEs have dropped as a ratio of total private sector financing from 9.2 per cent to 7.27pc.
In these turbulent times and with disruptive technology at work, bank lending against collateral tends to overlook the vital role entrepreneurship and intellectual insight play in the success of any business or enterprise.
After all, IT giants are the most successful enterprises with very little tangible assets but with huge employment of sophisticated human skills and technology.
In these turbulent times and with disruptive technology at work, bank lending against collateral tends to overlook the vital role entrepreneurship and intellectual insight play in the success of any business or enterprise
In some countries —where SMEs’ contribution to GDP was much higher than Pakistan’s — bank officials visited SME premises, discussed business problems and financial needs of the potential borrowers and helped them prepare balance sheets to establish their creditworthiness.
In Pakistan, microfinance banks have long been giving small, clean loans based on daily cash flow assessment of their customer’s business and without collaterals.
Under a scheme being drafted now, potential SME borrowers, with annual revenue up to Rs150 million, will be eligible for loans up to Rs10m based on their cash flow statements. The loans will be available at rates lower than the market. The borrower would not be required to pledge his assets with the lender while borrowing both for fixed capital investment and working capital.
The banks are expected to design innovative products and develop their capacity to reach out to smaller borrowers while the government would provide a risk-sharing facility.
Relying heavily on monetary policy/banks for financing rapid development of labour-intensive sectors and for reducing unemployment and poverty, may not be the most appropriate way. This is indicated by the slow start of bank financing for low-cost housing in a situation when banks’ non-performing loans are rising. The infection ratio has increased from 8pc in December 2018 to 9.3pc in March 21, 2021.
Fiscal policy should be more targeted than monetary policy to reduce inequality, says Cecilia Rouse, who oversees the White House Council of Economic Advisors, in the pandemic crisis. Monetary policy is natural trickledown says Nobel Laureate, Joseph Stiglitz. “Fiscal policy can work from the bottom and middle up.”
According to an analytical piece published by a leading US newspaper, the monetary policymakers in the US generally agree that their policies cannot stop a pre-existing trend towards ever-worsening wealth inequality. The write-up notes that the United States is providing cash relief to both the poor and the middle class to shore up their incomes. That is designed to jump-start the economy from the bottom and the middle to also ensure that post-pandemic economic rebound is more robust and equitable than it would be without proactive government response.
In Pakistan too a similar effort is underway that has helped an early, initial recovery. In the first phase of Ehsaas Emergency Cash programme, a sum of Rs179.27bn was reportedly disbursed to 14.83m beneficiaries with each household receiving a stipend of Rs12,000.
According to a just-released World Bank report titled ‘Living paper’, cash transfers remain the main instrument among the global social protection measures taken in response to Covid-19. A total of 734 cash-based measures have been planned or implemented in 186 countries.
Under the second phase of the Ehsaas Emergency Cash now under official consideration and proposed to be launched in June the number of targeted regular beneficiaries would be 8m. Another 4m beneficiaries with a higher eligibility threshold would be provided one-time cash assistance.
On the other hand, Prime Minister’s Special Assistant on Youth Affairs Usman Dar recently claimed that a total of 10,000 youth have directly benefited and 70,000 have got jobs so far from loans disbursed under Kamyab Jawan Programme.
Social safety nets, such as the Ehsaas Emergency Cash programme, stimulate consumption, demand and production based on the needs of the people.
In the United States, the amount of economic relief during the pandemic approved by the US Congress amounts to $5 trillion. That dwarfs the amount spent in the last economic recovery after the Great Recession of 2007-2009.
The repeated US legislative relief and stimulus packages are stated to be a mosaic of tax credits, stimulus cheques and small business support. And more relief for family support and spending on infrastructure is yet to come.
The approach is a big change from the wake of the last recession when the $800bn stimulus was not enough to fill the hole the recession left in economic activity. Instead, reliance was placed on US Federal Reserves for cheap money policies to pull the economy back from the brink. The outcome was a faltering recovery marked by widening wealth inequality. The stock market soared while workers struggled to find jobs.
At the start of 2007, the bottom half of the population held 2.1pc of the nation’s wealth, compared with 29.7pc of the top 1pc. By the start of 2020, the bottom half had 1.8pc while the top 1pc held 31pc.
On the fears of the economy overheating, the Biden administration has its own rationale. It reportedly maintains that the biggest risk is underdoing things, leaving millions on the labour market sidelines to struggle through another tepid recovery. A typical American worker has suffered about $14,000 a year in lost wages, unveils a study by economist Simcha Barkai.
Published in Dawn, The Business and Finance Weekly, May 24th, 2021