The Finance minister last week indicated to a group of journalists that the ministry is looking for resource from the SBP to fill the vacant DG debt position in MoF. Asad’s idea is to use talent pool of relatively better experienced and educated team at SBP to manage ministry affair as the latter lacks capacity. He had mentioned the idea in an interview to BR Research last month too.
However, he needs to tread with caution - there are two apparent issues in having too much SBP involvement in managing government fiscal affairs. One is that the SBP economic team’s capacity has seemingly dwindled in the past decade or so. After Shamshad’s term in 2008, three successive governors did not complete the terms. In India, top notch economists head central bank, but Pakistan digressed in the past decade.
Now the country is back in pre-90s time with SBP governorship in hands of a smart ex-bureaucrat. In the process, good resources the bank built up during Yauqub, Ishrat and Shahmsad time, gradually left the central bank - a few had opted for better careers, while others retired and the vacuum is created as not many were replaced.
The other important fundamental element is the conflict of interest between the central bank and MoF. The SBP’s team performance is gauged on the profitability and resilience of the banking sector - better returns on assets and equity amid high capital adequacy ratios of commercial banks are benchmarked as success of the SBP’ team.
With government (read MoF) being by far the biggest client of banking system, higher returns from government are prime reasons for resilient and robust banking system in Pakistan. Out of the total banking credit in Pakistan, 59 percent is the credit to government sector while 8 percent is to the PSEs - over two third of the system credit is allocated directly or indirectly to the government. The government assets are low risk (read zero risk) which brings resilience to banking assets, while higher spread over the low cost banking deposits creates profitability
The absence of DG debt at MoF resulted in issuing of long term papers (PIBs) at peak of interest rate cycle to enhance banks profitability at the cost of taxpayers. During Jan-Nov 2014, around Rs2 trillion PIBs issued at peak rates and there was no DG debt at that time - during Dec2014- Nov2018, an independent debt manager diluted the banks’ profitability which was at the cost of the federal government. The position is vacant again and the 10 years PIB cut off rate spiked by 445 bps from the last accepted auction in Jun18. Now, if SBP is involved in it, the institution bias would be towards commercial banks.
The other problem is the SBP monetary policy committee which either lacks capacity or is tilted towards commercial banks. When the MPC was first formed, two top economic minds of the country (Hafiz Pasha and Ijaz Nabi) were independent economists in it. Now the members lack that kind of experience and acumen.
With inflation at 6-6.5 percent and the full year inflation expected at 6.5-7 percent, there is no way to justify the discount rate at 10.5 percent. The real interest rates over 400 bps are unprecedented in the recent history and it is going to cost government more than the dent it would have on curtailing economic demand. The government’s contribution in demand creation is through PSDP where the significant cuts by federal and provincial governments are already doing the job.
The bottom line is that SBP needs institution strengthening while the case of capacity constraint at MoF is more worrying. And the capacity building should be done independently by not letting ministry affairs to be affected by SBP as not all the interests of central bank and government should converge.
Comments
Comments are closed.