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Non-performing loans (NPLs) of banks and development financial institutions have increased to a whopping Rs 435 billion. Those likely to condemn this rise by assuming that the bulk of the NPLs can be sourced to rich politicians, using their influence to have their loans written-off, must recognise that this is not the only component of the NPL that is germane to the problem.
The single largest defaulter of bank loans in recent months has been the textile sector, grappling with global recession that has accounted for a marked decline in the demand for Pakistani textiles. In effect, the Pakistani textile sector has suffered from a decline in unit price, attributed to the global recession, even as its unit costs have increased due to rising electricity rates, as well as loadshedding.
These factors notwithstanding, Pakistan's beleaguered textile sector is desperately trying to sustain its foreign markets for one obvious reason: if their presence in foreign markets ends at this point in time, it would be next to impossible to re-enter the market at some future date as the gap left by the loss of a market abroad is quickly filled by competitors. In this context, the sector's capacity to pay back loans to banks has been severely compromised.
By insisting that the textile sector must pay off its loans, as they fall due, may well lead to several closures with obvious repercussions on employment levels in the country, as well as the capacity to earn foreign exchange. This is not to deny that there are no unscrupulous textile mill owners, who took the loans not in aid of their mills, but to invest in the real estate sector in Dubai.
The fact that the Dubai real estate market has crashed has compromised their ability to pay back the loans. In effect, the reasons for the rise in NPLs are economic and it is extremely critical for the government's economic managers to take informed and effective measures that are designed to extend support to those who merit it notably the textile sector, the larger export earner in the country, and also to support the banking sector.
The second largest sector that has defaulted, is the cement sector. Pakistan's cement was being exported to Dubai as well as Afghanistan. The crash of Dubai World as well as US insistence that the Afghan government take concrete measures that reflect its commitment to end corruption, have contributed to lower Pakistani cement exports.
In addition, construction activity in Pakistan has also slowed down considerably, due to the ongoing terror attacks, as well as the reluctance of new investors to come into the market at this moment in time. In this instance too, the government needs to look at the overall picture and decide on how to provide protection where it is needed the most.
That some sort of state intervention is urgently required in these sectors is not in doubt; that this support is not yet under consideration is evident. It is unfortunate that political uncertainty has reared its ugly head once more and all thoughts of investment by the private sector have taken a backseat to the daily soap opera that Pakistanis are subjected to, with respect to the government's actions following the Supreme Court verdict.
While granted that the focus of the PPP-led government is naturally on the fallout of the verdict, yet the Finance Ministry, run by a non-political Finance Minister, must turn its focus on such pressing problems as the viability of the financial sector, as well as that of two major export-earning sectors that are suffering mainly due to the global recession.

Copyright Business Recorder, 2009

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