EDITORIAL: The dividend of tight monetary and fiscal policies is materialising in the form of falling inflation. Global softening of commodity prices is also contributing to this outcome. Inflation has dropped to a nearly four-year low of 6.9 percent, and analysts are expecting the full-year FY25 average to be between 6.5 and 7 percent, which aligns with the State Bank of Pakistan’s (SBP’s) medium-term target of 5-7 percent.
With the SBP reportedly paying Rs2.7 trillion in profits to the government, the finance ministry’s kitty is flushed with liquidity. This has boosted the confidence of the finance ministry, which recently stated that “the government plans to borrow on its own terms”. Credit, therefore, goes to the incumbent finance minister for effectively managing the treasury by leveraging his extensive banking experience.
The government has recently begun repurchasing treasury bills to reduce its interest costs. The strategy is to use the cash the government got from SBP (as its profits) for expenditures and repurchase securities maturing in bulk this December. Though it is a smart move, more action is needed.
This is certainly good news. However, there is no room for complacency and it is heartening to note that the finance minister is alive to the situation and the opportunity that it presents. He is focused on re-profiling the debt at a lower cost. The secondary market yield on 10-year PIBs has dropped to 12 percent and continues to decline.
It’s time to begin issuing long-term fixed PIBs to improve the maturity profile at a lower cost while interest rates are trending downward. The government should also push banks to sell government securities directly to consumers. While the option exists through non-competitive bidding, banks are reluctant to promote it because they prefer to earn the spreads. This is the ideal time to push banks to open up, as they are seeking advances to improve their advance-to-deposit ratio (ADR) to avoid higher taxes on a lower ADR.
Banks are lending at Kibor minus 1159 basis points (bps), allowing a few companies to secure loans at single-digit rates, even while the policy rate remains at 17.5 percent. The larger a bank’s deposit base, the bigger the discount it can offer, making borrowers the real beneficiary.
Increasing advances to productive companies is the best way to take advantage of lower inflation. The Prime Minister is eager to provide relief to the public, but the government should avoid directly offering subsidies or cutting taxes. Instead, it should support the private sector, which generates employment and drives prosperity for the broader population.
Private sector credit to GDP ratio is at a multi-decade low, as is investment to GDP. This investment needs to rise, led by the private sector. The finance minister should focus on fostering private sector growth, which will bring sustainable development.
Copyright Business Recorder, 2024
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