SBP awakens from slumber

Imposition of cash margin requirement by a central bank is a selective credit control measure, designed to check the flow of credit to a particular economic activity and generally resorted to in exceptional circumstances.
Realising that the prices of sugar had risen sharply during the last few months, the State Bank went into action on Friday, the 9th June, and imposed 50 percent cash margin requirement on all fresh advances/disbursements by banks against sugar stocks with immediate effect.
The banks were prohibited from financing the cash margin requirements themselves and also directed to fully adjust all previous advances against the security of sugar stocks latest by July 31, 2006. Besides, they were asked to ensure that renewals/fresh disbursements of such advances were made only after a clean-up period of at least one month with a 50 percent cash margin requirement.
The State Bank would monitor the situation closely and for this purpose banks were asked to report all such advances to the SBP on a fortnightly basis on a per prescribed format.
Coming at this late stage, the step of the State Bank, aimed at controlling the price of sugar through the curtailment of credit, appears to be more ostentatious than purposeful. We know that the imposition of 50 percent cash margin is meant to discourage hoarding and to ensure stability of sugar price. But the timing of the measure is really incomprehensible.
The price of sugar in the domestic market rose by almost 100 percent during the first quarter of 2006 and later seems to have stabilised in the range of Rs 36 - Rs 40 per kg.
The State Bank should have preferably acted and imposed a reasonable margin at the crushing time of sugarcane when there were indications that stocks of sugar were being cornered by the mill owners and other businessmen, or at least the Bank should have taken serious notice when the price of sugar started rising sharply in the local market. The State Bank in no way could be ignorant of the fact of the skyrocketing sugar prices.
It was making headlines in the media, the public was in distress and mercifully the government was taking notice by urging the mill owners to offload their stocks and arranging imports of the commodity. Not only the imposition of cash margin was delayed to a point where it could have only a limited impact but other policies of the State Bank also encouraged hoarding of the commodity.
The lending rates of the banks were only marginally higher than the inflation rate and there was ample liquidity in the money market which provided sufficient incentive and opportunities to the interested groups to take undue advantage of the situation.
Overall, the sugar episode is a somewhat sad reflection on the capacity of the State Bank to act in time and suggests that this premier institution of the country needs to be much more alert and responsive to the evolving situation in future.