THE State Bank has made history. Never in its 65 years of existence has it presented its annual accounts as late as it did this time — fully eleven months after the end of financial year 2010-11. The accounts, submitted to the government in October 2011, were published at the end of May 2012.
No explanation was offered for this extraordinary delay in their publication which reflects the central bank’s declining operational efficiency.
Auditors’ report has expressed the view that, according to its assessment, assets of the issue and banking departments are overstated by Rs5.98 billion and Rs6.88 billion respectively and unrealised appreciation on gold reserves of the banking department is overstated by Rs4.34 billion. Qualifications such as these are rarely expressed by auditors in their reports to the central bank shareholders.
Profit for 2010-11 declined by Rs5.76 billion despite an increase of Rs26.76 billion in net interest earned. The Rs56 billion attributed to ‘other comprehensive income’ seems dubious since 88 per cent of this income is attributed to ‘unrealised appreciation of gold reserves’ which the auditors have disputed.
Why did the State Bank profits decline by more than three per cent in FY11 when net interest earning increased by almost 16 per cent? This is principally because of a huge loss of Rs14.6 billion in the value of securities held for trading (note 38 to the accounts). This huge fall in securities value held by the SBP meant that there was a loss of Rs11.6 billion with respect to ‘other operating income net’. In FY10 this had generated a profit of over Rs10.4 billion. Losses with respect to amortisation of the SBP’s deferred income almost doubled from Rs278 million in FY10 to Rs541 million in FY11.
Exchange gain net fell from Rs11.7 billion in FY10 to Rs1.9 billion in FY11 — a fall of 84 per cent despite the continued depreciation of the rupee. On its foreign reserves portfolio of almost $15 billion during FY11, the SBP earned a rate of return of only 3.1 per cent significantly lower than that of China during the year. The gain was cancelled out due to corresponding loss of Rs144.7 billion to the IMF and an SDR loss of Rs6.6 billion. The SBP reserve management policy has proved both a failure year after year and this is the principal reason why Pakistan is now going back to the IMF with the begging bowl in hand once again.
There is an urgent need for moving foreign reserves out of dollar denominated assets and for terminating arrangements with the American firms that are involved in the management of our placements. An audit of our placement and official reserves account is long overdue.
Foreign exchange gain accounted for only 0.9 per cent of the total net income of SBP in FY11 — as against 5.6 per cent in FY10. This graphically illustrates the failure of the SBP’s reserves management policy. It also shows our rising vulnerability to IMF’s arm twisting measures.
The SBP direct expenditure rose from Rs6.97 billion in FY10 to Rs9.54 billion in FY11, a rise of almost 37 per cent. Administrative expenditure rose from Rs15 billion to Rs15.7 billion. Salaries went up by almost five per cent and retirement benefits by about nine per cent. This increase in salary-related payments occurred despite a reduction in SBP employees from 1521 in FY10 to 1479 in FY11. Salary increases for staff at OG, OG7 and OG6 levels have been significant and total remuneration packages at these grades usually approximate about Rs0.9 million per month.
Retirement benefits continue to increase year after year as longtime SBP officials are under relentless pressure to accept voluntary retirement. Outsiders usually with a foreign banking career background dominate the SBP leadership. Collective bargaining has collapsed.
Travelling and recreation expenses increased from Rs136.58 million in FY10 to Rs283.78 million in FY11 — a rise of 107 per cent. Medical expenditure is not shown anywhere in the notes to the accounts. Short-term employee (i.e. consultants) benefits increased from Rs58.1 million in FY10 to Rs109.6 billion in FY11 — a rise of about 90 per cent. Post employment benefits rose by about 20 per cent in FY11. Loans to employees increased from Rs37.2 million in FY11 to Rs59.6 million but loans repaid by employees fell from Rs24.6 million in FY10 to Rs16.6 million in FY11.
This is not a pretty picture. The SBP has not succeeded in achieving any of its monetary policy targets. For several years inflation has exceeded the target set by the SBP. The interest rate transmission mechanism is clogged and changes in the bank rate do not pass through to loan and deposit rates. Spread between deposit and loan rates remains very high. Bank portfolio infection in the form of stuck up loans is high. External borrowing and deficit financing is out of control.
Moreover, the annual financial statements of the SBP show ‘post modernisation’ of the bank’s institutional structure initiated under the stewardship of Dr Ishrat Husain has been a failure.
Foreign reserve management is ineffective in that year after year the country earns virtually nothing from its reserve placements.
The SBP’s own investments in stock market are ill advised. This is reflected in the colossal decline in the value of tradable securities held by the SBP during FY11. This is the principal cause of the decline in its profits during FY11. Both the market-based monetary policy and the post modernist institutional restructuring strategy adopted by the SBP should be abandoned and the State Bank should be placed under effective political control.