After the passage of the SBP autonomy bill by the National Assembly, the State Bank of Pakistan will be unveiling its strategy to regulate macroeconomic variables through monetary policy statements. The focus will be on inflation and unemployment. The general rule is that the tools employed in policy formation are interest rates, currency in circulation and the government securities.
In 2020, central banks around the world slashed rates 256 times versus 13 times hikes. While in 2021, 41 countries opted for monetary tightening and raised interest rates on 124 occasions. Addressing financial disorder caused by the pandemic, the central banks during this period of uncertainty aggressively used monetary tools by providing ample liquidity and by reducing the cost of funds through ultra-low policy stances. Simultaneously, reserve requirements were lowered; asset purchase was the most common tool that helped in lifting growth.
However, SBP and fiscal authorities will have to realize that ring-fencing has not proved to be a very popular strategy. Investment in government paper by banks is the onerous regulation, which is a drag on growth; it also adds to the debt vulnerabilities as the deficit grows on a regular basis.
Banks are comfortable in Pakistan by holding the safest asset since the last over 10 years, which is government debt as they are always and easily rolled over. For the banks it seems that the current size of GOP holdings—Rs 12.837 trillion (78.7%0)—does not bother them much and they are still keen to increase their investment portfolios. If the size is medium and does not grow rapidly, it is the safest instrument to carry on their balance sheets, as they are less risky.
But this strategy does not suit our economy. Apart from bank investments in government bonds/T-bills, the size of bank loan growth clearly depicts the fact that lending is lagging behind whereas, currency in circulation continues to grow while the cash is stockpiling. This is why loan to deposit ratio has plunged to record lows and yet no one cares.
If we take a look at the SBP data, average bank lending is on constant decline (48.4%) and savings percentage of GDP is too low in value (17%) despite multiplication of deposits. The surge in deposits is only due to debt expansion and interest accrual or paid interest that is pushing bank deposits higher.
An increase in GDP growth by rebasing is modification of core data, which is a common practice. It is simply an accounting adjustment that will not help reduce the loan/borrowing amount or kick up bank lending. This number will neither create new jobs nor will it increase the liquidity shortfall in the banking system.
With the current stance banks, unless compelled, will have zero interest to increase their lending portfolios. Instead Open Market Operation (OMO) liquidity injection combined with higher policy rate will encourage them to invest in the government paper. Banks cannot be blamed for investing and demanding higher return, as they are not abusing or breaching limits. This is why the width of the interest rate corridor needs to be widened. A 200 basis point (bps) floor and ceiling gap has proved it is not effective, which should be widened to 400 bps.
The policy should be reviewed by the monetary policy committee (MPC) meeting today to decide the SBP Policy Rate. It is expected that the MPC needs to address the issues and set a goal for safeguarding financial stability or take responsibility for failure.
The last policy statement hinted at a pause until March, but with rescheduling of the IMF meeting until Jan 28, a 25bps to 50bps hike should not be a surprise for the market.
(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)
He tweets @asadcmka
Copyright Business Recorder, 2022
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka
Comments
Comments are closed.