The National Credit Consultative Council (NCCC) at its meeting last Friday, January 16, presided over by the SBP Governor, Dr Ishrat Husain, reviewed the overall trends and dimensions of credit expansion and its impact on money supply over the first five months of the current financial year (July-November 2003).
The NCCC expressed complete satisfaction over what it described as "phenomenal" expansion in bank credit to the private sector which was 250 percent higher at Rs 156.8 billion compared with Rs 65.4 billion during the corresponding period last year.
Manufacturing sector accounted for 38 percent rise in the private sector credit, and personal loans tripled to Rs 19.1 billion.
It was noted that the period under review was marked by the new feature of diversification of bank credit to consumer financing and credit flows to the Small and Medium Enterprises (SMEs).
The SBP Governor was quoted as saying that it was for the first time that the consumer sector got an access into the bank credit, which he welcomed as a desirable change for the better in the availability of purchasing power to mostly middle income groups in society who were earlier deprived of this facility.
He was right in his interpretation that the credit flows to the middle income groups would contribute significantly to creation of employment opportunities in SMEs and housing construction which in turn would complement efforts towards poverty alleviation.
The advent of consumer financing by banks was also appreciated by the NCCC as the rapid increase in sales of automotive vehicles, electronic appliances, computers and other durable, would definitely go a long way to higher capacity utilisation and larger production levels in these industries.
In the ultimate analysis, the multiplier effect would not only encourage investment in expansion of industrial capacity in existing units but also new investment activity would receive a fillip.
The SBP Governor observed that this development promised accelerated growth in the manufacturing sector and as a result, the GDP growth rate of 6 percent was likely to come within reach.
Taking into account the wide ranging economic benefits of speedy credit expansion in the private sector, the NCCC reportedly recommended that the monetary policy should be tailored in such a way that it did not disturb the tempo of growth in bank credit to the private sector during the next six months of the current financial year.
An important aspect as noted by the NCCC was that the exceptional rise in bank credit to the private sector during the first five months did not cause an imbalance in the overall money supply in the economy which remained well below the target as earlier prescribed by the SBP.
The contributory factors were stated to be the targeted retirement of bank credit in the public sector.
This could be described as a vigilant overseeing of the trends in the money supply by the SBP during the period under review.
The conduct of the monetary policy thus seemingly yielded the desired results in the financial sector.
It will also not be out of place to point out here that the main factor which motivated the banking sector to diversify credit financing liberally to the private sector and at the same time to gradually withdraw from the safe havens of Treasury Bills, was the sharp decline in mark-up rates.
The development was attributable to the consistency in easy money policy of the State Bank of Pakistan.
With revenue collections in six months rising by 9.2 percent and non-tax revenue shooting up by 27.3 percent, the government borrowing was Rs 50 billion below the targeted level.
Three positive factors were reportedly responsible for the rise in non-tax revenue: (a) inflows on account of logistic support for US operations in Afghanistan were around $581.2 million as against the budgetary estimate of $250 million for the first half of FY 04; (b) profitability of public sector enterprises improved due to lower financing cost resulting in higher dividend pay-out; and (c) privatisation proceeds were also more than that projected in the budgetary estimates.
Reduced government borrowings for budgetary support led to relatively excessive liquidity in the banking sector which were thus compelled to seek diversified avenues for advances in the private sector.
The entire cycle of change seems to have brought about the desired pick-up in investment activity of the private sector for the benefit of the economy as a whole.
In this context, it has been proved that the private sector alone has the potential to serve as the engine of growth.
SBP is committed to be vigilant about all developments in the economy and to ensure that price stability is not threatened.
One time increases in the prices of sensitive items such as wheat is not as dangerous as a continuous upward spiral of price inflation.
The economic managers are confident that for FY04 inflation will be close to the targeted level of four percent. SBP, however, needs to ensure that the Consumer Price Index June 2004 over June 2003 should not peak to six percent.
There is always a time lag in obtaining desired results from action undertaken by the monetary authority in terms of tightening credit or checking the growth in money supply.
For two years the rise in money supply has been almost double of the nominal rise in GDP.
In FY03 it was due to build-up of foreign assets (forex reserves) and now due in FY04 it is on account of the rise in domestic assets ie phenomenal growth in credit.
Utilisation of higher credit should be for productive purposes and not merely for consumption if inflation is to remain in control.
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