SBP: 'It is not enough that we do our best...'

EDITORIAL: The State Bank of Pakistan (SBP) has recently released its annual performance review of 2020-21. The period under review was an eventful year for the SBP. Some of its schemes and initiatives launched in FY20 and FY21 such as concessionary finance and monetary stimuli and Roshan Digital Account (RDA) are noteworthy.

Some significant changes were made in foreign exchange regulations to support investment - especially in startups. The steps, including the launch of RAAST (instant payment system of Pakistan), and temporary waiving of IBFT (interbank fund transfer) fee towards digitization of the economy are commendable.

The overall visibility and communication of SBP improved in the last year. Nonetheless, the financial performance depicts a decline in profitability which is primarily due to IMF's (International Monetary Fund's) restriction of direct lending to the government of Pakistan.

It is important to note that Pakistan's economy, in contrast to many other countries' economies, bounced back in FY21. One of the reasons was easing of fiscal and monetary tightening cycle and natural rebound of the economy after a FY19-FY20 recessionary period. Nonetheless, it would not have been possible without a well-coordinated government policy consisting of smart lockdowns to tackle Covid-19 spread combined with SBP's timely actions of easing monetary policy and initiating concessionary finance schemes.

These initiatives were not arbitrary. The central bank did engage extensively with the business community across the country and sectors and acted in response to the need of the businesses while looking at the economic capacity; the SBP offered its schemes which were well received by the industries.

As a first step, the key discount rate was reduced from 13.25 percent to 7 percent within two months. Then the central bank came up with the concessionary refinance scheme (Rozgar scheme) to prevent mass layoffs.

According to the report, approximately 73 percent of beneficiaries were small corporates with annual turnover of less than Rs2 billion. SBP also offered deferment of principal payment of loans. What is important to note in this regard is the fact that 94 percent of its beneficiaries were microfinance clients. Its flagship scheme was TERF (temporary economic refinance facility) to help companies buy plants and machinery for greenfield projects and BMR.

The objective was for businesses to not forego their investment plans due to the pandemic. There was an inertia that led to low investment in FY19 and FY20. TERF attracted businesses like honey attracts bees. They were craving for low rates and long-term financing. There were Rs436 billion worth of loans approved to 628 industrial projects.

Prior to Covid-19, the MDR (merchant discount rate) share was adjusted to lure higher acquiring of POS (point-of-sale) machines. And due to Covid-19, SBP didn't hesitate to waive the IBFT fee to enhance digital payments. Inter Bank Fund Transfer (IBFT) transactions (digital) increased from less than 150,000 per day to over 800,000 a day. The IBFT fee has been restored; however, small ticker size payments of up to Rs 25,000 per month are still free. This acted as a catalyst to enhance digital transactions.

To make the payment system more digital, SBP launched RAAST last year. Until then the digital payments ecosystem had been working well in silos by telco-owned microfinance banks and commercial banks.

But to have vast outreach, the impediment was lack of interoperability of different systems. RAAST is a conduit on which different operators can communicate and settle (almost instantaneously) without any significant cost. This would pave way for fin-techs to launch applications and products for making payments and transfers swifter.

The launch of RDA like scheme had been on the cards for a while. Finally, the SBP launched it. It was not easy to attract the Pakistani diaspora and having banks on board to come with services desired by SBP. Once the flows started coming in, banks realised the opportunity to tap into savings of the 9 million-strong diaspora. In FY21, 181,556 accounts were opened - $1.56 billion came through RDA.

Right now, the number is over $2 billion with over 200,000 accounts. The flagship product is Naya Pakistan Certificate where better returns are offered to lure the expat and resident Pakistanis' declared money outside Pakistan into the country.

To improve the ease of doing business, SBP took several steps to facilitate cross-border trade and investment. The policy to invest abroad is eased. A framework has been introduced for acquisition of services from reputable providers from outside Pakistan. This would help startups and exporters to get services from outside the country to increase their reach and efficiency. This would also facilitate startups and help them in raising funds from abroad. Overall, FY20 was a good year for the economy and SBP.

The current account was in surplus for most of the time with economic growth at around 4 percent. However, the benefit of low commodity prices and less travel is now reversing. The current account is slipping fast, the PKR is under pressure and has significantly depreciated. Interest rates are moving up and are expected to rise further. SBP would do well if it tackles these challenges through its policy tools in FY22 in a phased manner so as to avoid any upheaval in the marketplace. Winston S. Churchill had famously said: "It is not enough that we do our best; sometimes we must do what is required."

Copyright Business Recorder, 2021