It is quite apparent that authorities of the country are trying all kinds of ways to mobilise foreign savings for a variety of purposes. In a bid to supplement the resources of the micro-finance banks/institutions (MFBs), the State Bank allowed them on 25th November, 2009 to raise loans from abroad through international financial institutions and other donor agencies to meet their funding requirements.
According to the SBP circular, the borrowing could be raised only in US dollar, euro, pound sterling and yen and the minimum tenor of the FCY borrowing should not be less than two years. The loan pricing will be based on a reference rate, such as Libor and the interest rate may be decided on best possible terms which may be competitive on other options available locally.
Further, the disbursed FCY funds were required to be immediately converted into Pakistani rupees and credited to the borrowing MFB's PKR account maintained with the concerned Authorised Dealer (bank). Under no circumstances, micro-finance institutions will be allowed to retain such funds in foreign currency. The Authorized Dealers may provide forward cover or hedging facility on the foreign currency loans to the MFBs from the interbank market in accordance with the prevailing foreign exchange regulations.
Fresh instructions of the SBP to enable the MFBs to have recourse to foreign resources for their funding requirements appear to be in line with the policy emphasis of the government to accelerate development and provide increased opportunities for employment through the establishment of small scale enterprises. It may be recalled that the State Bank had earlier facilitated the micro-finance banks/institutions to raise local currency funding from commercial banks/DFIs through Microfinance Credit Guarantee Facility (MCGF) under its Financial Inclusion Programme.
As a result of these initiatives, the MFBs would now have access to both local and foreign funding, helping them to expand their outreach in the country. However, while the idea of providing access to MFBs to raise foreign loan appears to be good, it could have certain repercussions for the country that are not hard to visualise. Obviously, the outstanding amount of the country's foreign debt and liabilities would rise as a result of foreign borrowing by the MFBs and debt servicing of Pakistan would also increase over time.
Whether the productivity in the economy, exports and debt paying capacity of the country would increase commensurately would be a moot question but the experience suggests that the country will increase its debt stock further without any visible improvement in these areas.
This will be sad because the country is already overburdened with foreign loans, the servicing of which is becoming increasingly difficult. Also, there is always a possibility of a financial institution of going bust due to poor quality of its assets. In such a situation, it is always the taxpayers of the country who have to pay the price of failure of an institution in one way or the other.
In our view, the best option for the State Bank to encourage the MFBs would have been to induce them further to mobilise higher level of domestic resources to meet their funding requirements in order to promote the concept of a self-reliant economy which is the best way forward in the present situation. However, if the access to foreign funding was deemed necessary, the maximum amount of foreign borrowing of a MFB should have been linked or prescribed as a percentage of some of its vital parameter/variable to limit their overall exposure.
All considered, the best option for the country is either to rely on domestic resources or seek foreign direct investment for its development effort and the promotion of other economic and social goals. It is better to desist the temptation of foreign loans in one form or the other at this juncture.