KARACHI, Dec 2: The State Bank of Pakistan (SBP) will intervene for providing higher returns to the depositors if the banks fail to reduce the banking spread and provide better yield on deposits.

This was stated by SBP Governor Dr Shamshad Akhtar while addressing a press conference at the launching of State Bank annual report on economy here on Saturday.

“I have told the large banks to increase return on deposits otherwise the state bank will intervene to get the result,” she said, adding that the SBP would take a decision in this regard possibly in January 2007.

The prevailing banking spread is highest in the region which is above 7.5 per cent and despite record profits the banks are not sharing profits with the depositors.

She said the SBP did not want to intervene for bringing down the banking spread as the best way to deal with the situation was competition among the banks. She said it was unexplainable why depositors did not change their banks when they could get better returns.

Dr Akhtar said the depositors were getting negative returns when real interest rate (real return) was considered for calculation. She also advised the depositors to shift their deposits to other banks as some banks were offering better returns and put their money in time deposits for higher returns instead of keeping it into current account or saving accounts.

She said there was worldwide change in the central banks’ role and social responsibility was another aspect of the regulatory authority.

She said the inflation target, 6.5 per cent for 2006-7, was achievable but the CPI was a troubling factor mainly because of high food prices. “Corrective measures are needed to streamline the distribution system which causes the food price hike,” she added.

The central bank governor

expressed concern over the government’s reliance on the SBP for borrowing, and proposed keeping borrowing within manageable limits.

The expansionary fiscal policy in financial year 2007 had compounded the risk to the economy; she said, adding that besides contributing to inflationary pressure, the government’s higher funding requirement induced more pressure for raise in interest rates to curb incremental pressure on the economy.

“The key fiscal risk may emerge if the necessary growth in expenditure is not matched by a commensurate increase in revenues, resulting in the loss of the hard-won fiscal space gained in recent years,” she said.

She was also critical about the low tax to GDP ratio. “The tax collection has increased but it is less than what is required,” she said.

She showed concerns over a relatively narrow growth base, persisting high inflation, pressure in fiscal deficit in the backdrop of a nearly stagnant tax base which kept the tax to GDP ration in the range of 10 to 11 per cent for over a decade and widening of the current account deficit.