EDITORIAL: Pakistan’s Advance to Deposit Ratio (ADR), defined as comparing banks total loans to total deposits ideally at 80 to 90 percent, declined to 37 percent in June against 41 percent in December last year while Investment to Deposit Ratio (IDR), a financial metric comparing total investments to total deposits ideally at 80 to 90 percent, surged to 94 percent in June 2024 against 88 percent in 2023.
This data was revealed in the latest issue of an A F Ferguson publication titled Road to Sustainability carrying insights from over 25 industry leaders, over 10 local and global surveys, snapshots of over 40 international banks and over 10 geographic regions.
The low ADR therefore indicates credit to the private sector which, as per the Finance Division’s monthly publication for October titled Economic Outlook and Update, was negative 240.9 billion dollars (1 July to 11 October 2024) against negative 247.8 billion dollars (1 July to 13 October 2023), which explains why large-scale manufacturing sector (LSM), the major private sector borrower, registered negative 2.65 percent in August 2024 against positive 0.21 percent in August 2023 though the July-August 2024 average of negative 0.19 percent against negative 2.53 percent in the comparable period last year is being cited as proof positive that output is on the rise – a claim backed by a rise in consumption. Ignored however is the fact that the rise in consumption can be sourced to depleting inventories rather than any increase in output.
The report further notes that only 25 percent of the farm sector was serviced by banks, with the remaining 75 percent comprising of subsistence and poor farmers relying on the informal sector, at exorbitant rates, for their credit needs. Out of 5 million micro, small and medium enterprises surveyed, less than 3 percent accessed credit from the banking sector.
This data reflects the extent of success of the State Bank of Pakistan’s stated goal to improve access to financial services to marginalised groups and for micro and small enterprises through credit guarantee scheme for small and rural enterprises, microcredit guarantee facility and technical assistance fund; as well as the success of Financial Innovation Challenge Fund that envisages government to person (G2P) payments, promoting innovative rural and agriculture finance and promoting excellence in Islamic finance.
The high IDR is explained succinctly in the IMF’s October 2024 Staff-Level Agreement report uploaded on its website: “the balance sheets of the three parties, the sovereign (government), commercial banks, and the central bank have become highly interconnected.
This complex tripartite relationship means that developments or actions in one domain (e.g., fiscal, monetary policy and the banking sector) can have wide-ranging effects across the economy. It also significantly affects the strength of monetary policy transmission by impinging the relationship between policy rates, private credit, and, private investment and consumption decisions.” The government remains by far the largest borrower, though the bulk of its borrowings are not used to fund development expenditure that contributes to growth, but for current expenditure that does not.
There is a need for a revisit to the government’s borrowing sources. The Savings Centres that attract savings from the private sector with deposits entirely appropriated by the government and itemised as unfunded debt must be used for private sector investment only.
As matters stand today, the government manipulates the savings rate on these Centres’ products, linked less to the discount rate and more to the government’s need for borrowing and capacity to meet the interest payments to the private savers.
As repeatedly suggested by Business Recorder the solution lies in massive curtailment of current expenditure that would require voluntary sacrifice by the elite recipients as well as reforms in the pension system paid for by the taxpayers to only 7 percent of the country’s labour force drawing a salary from the treasury.
Copyright Business Recorder, 2024