JUDGING by the interest rate structure, the year 2003 was good for the borrower—but bad for the saver. It brought relief for businessmen particularly exporters who received much cheaper export finance than in the past and were able to increase exports. But it gave the saving public particularly small savers a shock: falling returns on bank deposits as well as national saving schemes made them suffer.
In the first half of 2003, weighted average lending rate of all banks combined fell from 10.31 to 7.58 percent, and weighted average deposit rate from 3.60 to 1.90 percent. The trend continues. At end-October, average lending rate came down to 5.32 percent and average deposit rate sank to 1.45 percent. Figures for November- December are awaited.
HAPPY BORROWERS: A big fall of about five percentage points in average lending rate in the first ten months of 2003 made borrowers happier. Whereas prime borrowers got bank loans at lesser than the average rate, a vast majority of them continued to borrow at slightly higher rates. But they too felt happy because their cost of borrowing was, however, much lesser than in the past.
Banks managed to lend at low rates primarily due to a big rise in liquidity. Liquidity shot up on higher inflows of foreign exchange through workers’ remittances, or money sent back home by overseas Pakistanis. The easing of the monetary policy in November 2002, through 150 basis points cut in the State Bank’s discount rate, also facilitated lowering of banks’ lending rates.
EXPORT FINANCE: Though the SBP kept the discount rate unchanged in 2003 it let the treasury bills yields fall sharply: the weighted average yield on six-month bills fell 268 basis points, from 4.32 percent in December 2002 to 1.64 percent in December 2003. As a result, the export refinance rate that is linked to six-month T-bills rate also fell from 5.5 percent to 1.5 percent. This enabled the exporters to get export loans from banks at 3 percent instead of 7 percent. (Banks keep a maximum 1.5-percent spread on SBP’s export refinance rate while pricing export loans).
This 400bps fall in the export loans’ markup was one of the several factors that boosted exports. Out of total exports of $11.2 billion in the last fiscal year, $5.9 billion exports or 53 percent of the total were made in January-June 2003. And, between July-November 2003 also, exports were up 11.5 percent to $4.834 billion, from $4.334 billion a year-ago.
SAVERS’ PLIGHT: Since banks had created room for slashing lending rates primarily by reducing returns on deposits, savers remained at the receiving end in the outgoing year. Average rate of return on bank deposits declined 215bps in ten months to October 2003, from 3.60 percent to 1.45 percent. This, obviously, is a negative return as it is far below the annualized consumer inflation of 2.2 percent at end-October. In fact, average return on bank deposits had turned negative at the beginning of the outgoing year. At end-January 2003, the rate had sunk to 3.2 percent against CPI inflation of 3.5 percent.
NSS RATES: Not only did the rate of return on bank deposits fell sharply, but returns on fixed-income national saving schemes also touched new lows. The government twice revised the interest rates on NSS, first in January and then in July 2003. These downward revisions put together, lowered the return on the most popular 10-year Defence Saving Certificates to 8.5 percent from 11.61 percent—a big fall of 311bps within a year. The rates of return on NSS came down, as the government went ahead with its policy of bringing them gradually at par with the yield on Pakistan Investment Bonds. But realising people’s hardships, it launched two tailor-made saving schemes with a higher rate of return, one for widows and the other for retired employees of the government and semi- government organisations.
People hope that the government will come up with a similar scheme for private sector pensioners and senior citizens—or cover them under the Pensioners’ Benefit Scheme—the one launched for the public sector pensioners. This scheme, as also the Behbood Saving Certificates launched for widows, currently offer 10.08 percent return for ten years—a rate substantially higher than the return being paid on other 10-year national saving schemes.
STOCKS RISE: Perturbed over falling rates of return on bank deposits as well as on NSS, people scurried around to explore better saving and investment avenues. The stock market was one, which performed superbly in the outgoing year. Karachi Stock Market 100-share index shot up from 2661 points at the last week of December 2002 to 4311 at the end of the third week of December 2003. But the stock market did not attract majority of small savers who lack the understanding of this market and are thus averse to investing in it. Many of them had no option but to hold cash—and they still look for low-risk, high yielding saving instruments.
EXCHANGE RATES: The US dollar lost 89 paisa or 1.5 percent of its value against the rupee in the outgoing year, falling from Rs58.35 on December 31, 2002 to Rs57.46 on December 23, 2003. The greenback would have fallen by a much bigger margin had the SBP not supported it by mopping up excessive inflows of foreign exchange from the banking system. The central bank did this for two reasons: first, to keep rupee liquidity levels within check to avoid inflationary pressure and secondly, to benefit exporters.
But even this marginal fall in the dollar value was a source of satisfaction for importers whose cost of imports decreased, though nominally. More than that, they were able to draw import plans more comfortably throughout the year knowing that the rupee would remain stable. It is a separate issue, however, that many analysts were critical of the SBP policy to keep the dollar stable. For them, the benefits of a weaker dollar outweighed the benefits of a stronger one for Pakistan’s economy burdened with $33.4 billion external debt as at end-September 2003.
At this level, one-rupee fall in the dollar value saves Rs33.4 billion through reduction in rupee-cost of the external debt.
EXPORTERS AT EASE: In 2003, exporters remained at ease. They knew that one of the considerations before the SBP for not allowing the dollar to fall sharply was to support them. Had the dollar fallen by a big margin vis-‘-vis rupee, in relation to its wider decline against world major currencies, Pakistani exporters would have faced difficulty in maintaining their competitive edge over their rivals in the world markets.
CHALLENGES AHEAD: But it is becoming increasingly difficult for Pakistan to keep defending the dollar. The reason is that the benefits the country can reap by allowing a sharper fall in its value are equally large—if not larger than the benefits of supporting it. Besides, the SBP policy under which it keeps mopping up excessive inflows of foreign exchange from the banking system through dollar buying has also come under question.
This policy has made the central bank poorer but at the same time created more fiscal space for the government by reducing its cost of domestic borrowing. Economists warn that rising inflation on the back of increased cash holding and zooming private sector borrowing from banks may compel the SBP to change its easy monetary policy stance.
They believe that the interest rates have already bottomed out and now look set to rise next year. But the pace of increase in interest rate would depend on the pace of growth and inflation. “Seemingly it would be a slow process,” to quote senior economist of the Asian Development Bank, Mr. Naved Hamid, who spoke on Pakistan’s economy in Islamabad the other day.