ARTICLE: State Bank of Pakistan (SBP) announced a reduction in Temporary Economic Refinance Facility (TERF) from 7% to 5% and simultaneously slashed Long Term Financing Facility (LTFF) mark-up rate by 1% to 5% for all sectors. In January, the SBP announced enhancement of LTFF limit to Rs 5 billion from Rs 2.5 billion and additional concessional financing of Rs 200 billion to banks with Rs 100 billion allocated to each; LTFF and Export Refinancing Scheme (EFS).
The central bank is constantly making an effort to support businesses by reducing policy rate and providing liquidity in small chunks, to alleviate their suffering due to the pandemic. Since March 2020, it has aggressively cut policy rate on five occasions by 625 basis points to 7%. In April, SBP provided a 5% cushion by reducing the Special Cash Reserve Requirements for its total FE-25 Deposits that resulted in release of liquidity to the tune of Rs 60 billion plus.
For over a decade, our Fiscal and Monetary Policy managers took wide-ranging measures to turn the tables. But it never worked; instead, balance of payment and current account deficit positions continued to worsen, adding pressure on the exchequer. Debt and deficit financing conditions never got better without borrowing support and kept on piling because the basic problems were not addressed and halfhearted temporary measures that were insufficient and miniscule in size were taken with the consequence that there was hardly any positive effect on the economy.
Over the years, the SBP through its open market operations (Reverse Repo-Injection) is constantly providing liquidity to banks, which is almost double the size of the amount of credit that banks provide to the private sector. The biggest dent caused to our banking sector was in the shape of outflow of $ 4.247 billion hot money (Treasury bills/Bonds of which $ 3.11 billion. Equity $ 1.13 billion). Every economist in the country was critical of investment by foreigners through SCRA in T/bills and Bonds. No one highlighted the $ 1.13 billion equity outflow, which was hot money too; probably, they did not know about this accounting entry. SBP was blamed for paying an average return of 13% to investors on government paper. "NONE OF THEM WAS CORRECT". Foreign investors were carrying the risk of foreign exchange exposure, as depreciation cost was roughly 6% at the time of remittance.
As we are a borrowing nation, hot money was and is a win-win situation for Pakistan. Cost in terms of rupee for $ 4.247 billion outflow of hot money is very high and painful too as it served two purposes. It added Rs 700 billion liquidity to the banking system, which is more than the credit provided to the private sector in FY19 and more than two times of credit given in FY20.
The best part is that when foreign funds are received by opening an account through SCRA, they do not hit Net Open Limit (NOP) of a bank in Pakistan as the limit is not utilized, but when conversion happens, they hit the limit or get utilized at the time of remittance. Since SCRA is a convertible rupee account for non-resident investors so that the conversion doesn't require approval for remittance.
This is why SCRA funds has always been a blessing in disguise, as it provided a cushion equivalent in Rupee amount. After the outflow of SCRA funds, to meet funding requirements due to a severe shortfall in revenue target, a plunge in exports and remittances, SBP had to inject liquidity through its open market operations, adding pressure on domestic debt and its financing.
It is imperative to address the real cause of economic misery. The economy can never flourish unless we are able to generate a sizable amount of income. The economy which needs Rs 300 billion monthly to finance its deficit cannot survive on negligible size of growth. In rupee terms, the economy needs to grow in over a couple of trillions. The quantum of monetary damage is so huge that growth in billions will only add to our debt burden in trillions.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Copyright Business Recorder, 2020
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