THE easing of monetary policy has been cheered by capital market that surged to hit a new record. The enhanced activity in the urban property market is signaling revival. Corporate Pakistan, however, has yet to respond to the sliding credit cost.
As soon as the inflation moderated, the State Bank changed its monetary stance to spur growth in the lagging economy. Since August 2011 the central bank has cumulatively lowered its policy rate — from 14 to 10 per cent — to divert the corporate earnings towards investment through cheaper credit.
There was nothing to indicate any reversal in the declining investment trend reported in the latest Pakistan Economic Survey issued in June. It reported drop in the rate of real investment from 13.1 per cent a year before to 12.5 per cent in 2011-12. The private investment contracted to 7.9 per cent as compared to 8.6 per cent of the GDP.
In its current annual report, the State Bank mentioned that year-on-year growth in loans to private sector has declined from 22.4 per cent in FY2008 ( and close to 4.9 per cent in FY2011) to 0.7 per cent by the end of FY2012.
Successive rate cuts were hailed by the business community from multiple forums. However, the verbal appreciation has not been followed up with greater access to credit. The falling lending rates did not reverse the downward sloping graph of credit off-take.
The private sector representatives explained this disconnect to Dawn. The representatives of drug, auto and textile sectors defended their reluctance to borrow. They partially blamed the banks that, they said, were risk averse and preferred to lend to the government.
“The banking sector acts as a cartel. They collude to keep lending rates high. The high banking spread nudged them towards inefficiency. They feel no pressure or take pains of dealing with retail borrowers. And they are not fulfilling their primary role of acting as an intermediary to channel idle funds to productive sectors”, Iqbal Ibrahim, former president All Pakistan Textile Mills Association commented over telephone.
Shaukat Tareen, ex finance minister and a seasoned banker endorsed the perception. He suggested changes in policy framework to force commercial banks to take a long-term view and play their role in economic recovery.
“The commercial banks are opting for easy and secured option of investing in treasury bills. The SBP has allowed them to keep 17 per cent of their statuary liquidity requirement (SLR) in Term Finance Certificates (TFCs). I know for a fact that big banks have kept as much as 50 to 60 per cent of SLR in TFCs. The government should tax the amount put in TFCs in excess of 17 per cent to discourage banks to think short- term.
“Besides if banks ignore depressed investment rates, the time is not far when they along with the rest of the economy will be in trouble”, Tareen told this scribe over telephone.
Many members of the business community laid the onus of responsibility for inadequate the private sector borrowing on the government. The government, they said, has not been able to win the trust of the private sector that continued to teeter on the edge because of inconsistent industrial policies and insufficient infrastructure support.
“Our fate hangs in balance. The pharmaceutical sector has been stagnating for the last one year and a half since the government disbanded the federal health ministry. There are 14000 drug cases pending for registration. For over a year, the sector was without a regulator. In February 2012, the Drug Regulatory Authority was notified through a Presidential Ordinance which. is due to expire in parliament on October 14. Our industry needs regulatory oversight or our products will loose credibility and export markets. Who, in his right mind would expand business in this environment?
“I planned a project but decided to put it on hold for better times. Should I be blamed for the reluctance?”, Zahid Saeed, former president of Pakistan Pharmaceutical Association asked bitterly.
“The government so far has not been able to make up its mind what exactly it wants to do with the automobile sector. One day it bans import of used cars, the next day it decides to allow it.
“Currently, manufacturers are piling up inventories because of contraction in demand. We are slashing production and you do not need loans when you are cutting on your operations. Besides, because of policy unpredictability, we prefer to operate un-leveraged. We try to finance BMR from our own resources to sustain policy shocks”, Pervez Gias, President Pakistan Automobile Manufacturer Association said commenting on the low credit off-take.
Many bankers, however, defended their preference for investment in government papers. They found it inappropriate for people to blame banks for follies of others.
“The lending to the government is secured and easy as compared to the private sector. The businessmen haggle over rates and their credit history has not been impressive”, a senior banker said, hinting at the piling up non-performing loans on banks’ balance sheets.
“I have not received a single loan application for the last one year from any client that includes businessmen. If business is not ready to borrow what can we do?, a business manager of a foreign bank branch in a posh area commented.
High ranking government officials in Islamabad were critical of the country’s private sector that, they insisted, lacked vision, vibrancy and entrepreneurship. “Business groups leaned on the government for too long and for too much. They avoid risk like plague and abhor competition. They were ready to loose money elsewhere (reference to the property bubble in Dubai in 2010 where Pakistani businessmen lost billions) but desisted long-term investment in the country that made them rich”, a key member of the government economic team commented with contempt.
An independent analyst felt that the lower credit cost will eventually boost investment. He argued that time lag in the policy change and readjustment in the private sector behaviour need to be understood to avoid wrong conclusions. Besides, he felt, that the weight of other factors influencing investment decision has to be taken into account in analysing investment trend.
An economist believed that the corporate Pakistan was awash with liquidity and did not need bank money to finance expansion. “We must keep in mind businessmen’s access to financing sources outside the fold of formal economy when gauging their reaction to policy rate cut”, he said pointing to avenues in the parallel economy.