The strategy seemed logical because, instead of borrowing more, credit balances in some accounts of the state could be utilised to fund shortfalls in others. But, going about achieving that objective requires visualising the consequences it may entail. A sudden move could damage the financial system that, fairly or unfairly, is benefiting from cheap surpluses in bank accounts of the state offices.
The issue requiring examination is the possible reduction in public borrowing the move could lead to. According to the ‘Analytical Accounts of Scheduled Banks’ posted on the SBP website, at the end of April 2008 the position was as shown in the table.
If these statistics are correct, they indicate a net overall surplus of nearly Rs436 billion in the accounts of federal ministries and PSNFCs, though not every federal ministry or PSNFCs had a surplus. Many of them were net borrowers; this is reflected in the overall bank borrowing (Rs378 billion) of the federation and PSNFCs, proving that banks were not only benefiting from state funds but were also funding the state’s borrowing needs.
Funds lying in saving, current, call and other deposit accounts represent liquidity that state entities consider appropriate for making their routine payments. In some, cases these balances may have been excessive but it is undeniable that the state and the entities it guarantees (conventionally assigned zero risk) can’t afford to fail in their payment commitments and therefore must carry requisite liquidity.
Of the total deposits (nearly Rs714 billion), fixed deposits of the PSNFCs amounted to Rs149.4 billion. A similar break-up of the federal government deposits has not been provided but, surely, a part of the total were fixed deposits. Given the huge federal debt, keeping funds in fixed deposits seems odd. But in that respect too the tenor of the deposits is of essence.
Based on their experience of delays in acquiring back the unutilised funds temporarily surrendered to the ministry of finance may have induced some ministries and PSNFCs to retain these funds in fixed deposits rather than surrender them. Funds placed for periods of up to three months may therefore represent their profitable investment until the funds are spent.
However, keeping surpluses in longer-term deposits was inadvisable because temporarily surrendering such funds to the ministry of finance could help contain government’s short-term borrowing – seemingly, a lapse on the part of the Debt Management Office. However, in the absence of an explanation thereof, the conclusion may be unfair, though reasons behind such deposits need looking into.
Although reducing federal debt to the extent of government’s net funding need is valid, the process of going about achieving this aim calls for a practically implement-able policy on shifting balances from one state office account to another, establishment of an authority to effect such fund transfers, and a reliable communication system that ensures timely transfers, to protect state offices against dishonour of their payment commitments.
While the government may shift the accounts of its ministries to the SBP, shifting PSNFC accounts to SBP will not be viable, firstly because, to stay connected to the markets they serve, these entities require banking services that SBP cannot provide and, secondly, many of them are net borrowers. Even while shifting ministries’ accounts to the SBP the impact thereof in terms of the demands it will create on SBP, and the convenience of the entities inter-acting with the ministries, must also be taken into account.
In the context of reducing its borrowing from the SBP, federal government moves to mobilise resources (two per cent hike in profit rates on National Saving Certificates, quarterly revision of these rates to continually align them with market rates, and flotation of short-term commercial paper for investment by the public), are significant for banks because unless they devise competing deposit products, they could lose a significant part of their deposit base to the government.
These developments have serious implications because banks that hold federal government and PSNFC deposits have used them to sustain liquidity (and credit flow) in Pakistan’s financial markets. Even if implemented partially, shifting of state accounts to SBP could substantially reduce market liquidity and credit availability to the private sector. This could also push up mark-up rates very significantly.
This impact must not be overlooked because sustained market liquidity (to meet legitimate borrowing needs of the private sector) is essential for achieving the targeted 5.8 per cent GDP growth. High mark-up rates could fuel inflation domestically, and price the export sector out of the markets it has so far held on to, with considerable difficulty. This development could escalate rather than contain trade and current account deficits.
Simultaneously, banks must re-visit their lending ratios (imprudently high in some cases) and hasten the development of innovative deposit products (not taken seriously) to hold on to their deposits. More importantly, banks that hold government deposits must jointly work on a strategy to assure the government about quick movement of funds in its various accounts to visibly reduce its borrowing, with minimum shifting of accounts to the SBP.
Finally, it wasn’t wise on the part of banks to rely for cheap liquidity on lapses in public debt management. It was unethical to use this liquidity to increase bank earnings and unwise too because it induced banks to pay scant attention to developing need-based deposit products to inculcate a saving rather than a consumption culture which is now the country’s biggest weakness.
The responsible course was to voluntarily advise the state to reduce its debt by utilising surpluses available in its bank accounts; such conduct would have manifested a high sense of social responsibility that, unfortunately, the banks did not realise.