THE monetary policy for FY06 must take into account the monetary overhang of previous years. International financial institutions have publicly underlined the phenomenon of monetary overhang.

The Credit Plan for FY 06 aims at monetary expansion at the rate of 15 per cent-based on the likely growth rate and inflation. In the light of unfolding economic situation in the early months of FY06, both the assumptions are being questioned even by international financial institutions.

Even in the most likely event of assumptions regarding the growth rate and inflation are realized the 13.1 per cent rate of monetary expansion would be in the nature of “accommodative” monetary policy and by no means a “tight” monetary policy. This would qualify to be termed as “tight” only when the rate of expansion is less than the rate of growth in nominal terms, that is real growth plus inflation. It is only then that the monetary overhang can be countered.

During the current year, the State Bank has allowed credit expansion at a brisk pace with the result that, despite the normal seasonal contraction in bank credit due to disposal of cash crops and wheat, there has been a significant increase in outstanding bank credit. Till October 8, 05, credit to the private sector had increased by Rs40.9 billion or by 2.4 per cent. Net domestic assets increased by Rs65.5 billion, or 5.2 per cent as against Rs12.5 billion, or by 1.2 per cent last year.

It would be stating the obvious that in Pakistan-a country of the elite, monetary policy has been designed primarily to serve the elitist of the elite leading to further concentration of wealth in those hands to the detriment of the common man. This is at a time when there is so much talk of poverty alleviation. The big business, mostly family owned, is highly, rather excessively, leveraged due to cheap, to the point of negative real rate of interest, and abundant availability of bank credit.

This has restricted the growth of broad based corporate enterprises, which could usher in an era of “share holders’ democracy”, and effectively serve as a means of diffusion of wealth. The rescue package for the stock exchange would benefit those handfuls who were, in the first instance, responsible for the crash leaving the naïve small investor in the cold.

The anti-poor bias of the essentially urban based banking culture is quite obvious from their, at best, nominal lending to the small man and the shabby treatment of the legion of small depositors. The increase in credit to agriculture would, as usual, stop at the door step of big land holders and would not trickle down to the needy small farmers. In fact, this cannot reach them so long as the rural areas do not have bank offices to give access to this deprived class, at present at the mercy of non-institutional sources of extremely costly credit.

Banks prefer to fatten themselves on the increase in the spread between advance and deposit rates and not share it in a meaningful way with the depositors who have been getting a highly negative real rate of return even for those who may be fortunate enough to qualify for it.

Banks individually fix the threshold for return on deposit so high that most small depositors are left out. To begin with, banks discourage small depositors by fixing a minimum balance to be maintained and penalize them in case of shortfall. The withholding tax adds insult to the injury.

Unlike the regular income tax, there is no basic exemption and every rupee is taxed and taxed at 10 per cent, a rate twice that in the first bracket of income tax. No wonder the number of personal deposit accounts had declined sharply to 17.3 million in 04 for a population of 150 million..

At the recent annual meeting of the Institute of Bankers in Pakistan, the State Bank Governor, in his residential address bemoaned the step motherly treatment of depositors by banks and warned them not to exploit them so ruthlessly. Coming at the fag end of his tenure, this was a kind of farewell address. One wished that this had been realized by him much earlier when he could do some thing about it.

The State Bank can, as a policy measure, do a great favour to bank depositors, by giving up its archaic developmental role, at best pertinent to the fifties, and stop injecting money into the economy at a massive scale.

Instead, it should restrict itself to its primary traditional regulatory function with minimum provision of funds, as the lender of last resort. Injection of money supply by the State Bank not only adds fuel to the fire, but is also detrimental to the interest of savers in general and bank depositors in particular, because it undermines banks need to go to the saver to meet their financing requirements.

The State Bank has provided a permanent pipeline to banks by way of refinance for export and locally manufactured machinery at a subsidized rate giving the initiative for the extent of its use to banks themselves. It is very significant that the banks prefer to use this facility and not deposits which they can acquire at a much cheaper rate. This may be due to its administrative convenience, but certainly interferes with money supply and banks’ effort for deposits. The subsidy for export financing without these deleterious effects can easily be given as a straight cash subsidy, which would be more open.

(Concluded)