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The central bank has announced revisions to its framework for bank financing for private sector wheat procurement. Based on initial impressions, it appears to be a mixed bag of welcome steps, peppered with concerns of over-regulation.

One of the most overt changes this season is permission to grant bank financing for imported wheat. Readers will recall that this is a sharp divergence from a circular released just two weeks ago, where banks were instructed to restrict seasonal credit to wheat grain millers to local procurement only.

This is not only a positive development considering the federal government had earlier announced plans for import quota of 5 million tons wheat (aggregate for both public and private sector imports). Now, with access to inexpensive bank financing, private sector participation for wheat import may be more pronounced compared to last year. But more importantly, the decision lays bare central bank’s own estimates of national wheat output during current season, and confirms widely held beliefs that it may not succeed in meeting domestic demand.

Similarly, SBP has exempted banks from demanding 10 percent cash margin against bank financing, freeing up liquidity in the system. Already, formal sector wheat grain millers with access to banking credit are far and few, and requirement for cash margin only create further complications, bidding domestic prices higher.

To put things in perspective, PASSCO and provincial Food departments borrowed incremental credit of Rs 60 billion for wheat procurement operations from commercial banks’ last year. It is also worth recalling that the incremental debt is in addition to a ‘mini’ circular debt already accumulated at close to Rs 700 billion (for both PASSCO and provinces), much of which has become hardcore. In contrast, total pledge financing for wheat procurement purposes to private sector peaked at just Rs 18 billion during private buying season. Talk about the crowding out effect!

But there is much more that’s wrong in the financing policy for wheat procurement, that probably goes deeper than periodic circulars released by the SBP. For one, availability of bank financing post July 01st means that for all intents and purposes, private sector may only be eligible to access credit if it procures from governmental food departments. And that discrimination is both implicit, yet overt.

For one, because PASSCO and provincial Food departments procure during the peak harvest period – March 15th to May 30th – availability of credit to private sector after a month’s delay means they are discouraged to participate in directly buying from farmers. On one hand, it helps the optics as SBP is seen as supporting government’s procurement targets. On the other hand, it runs contrary to the spirit of SBP’s own research output, which – no surprise – has discovered that the bureaucratic inefficiencies in government operations only adds frictions and transaction costs, leading to deadweight loss.

Two, the circular notes that “banks may provide financing facility to functional flour mills for purchase of indigenous wheat from their authorized representative and respective Food Department against supply of wheat by them”. While on surface, it may appear that private sector is permitted to procure from sources other than Food departments, the tone of the circular will ensure that commercial banks’ only err on the side of caution, given how petrified they are of attracting regulatory scrutiny even under normal circumstances, let alone at a time when the country is in the throes of a grain price spiral!

Some much-needed restrictions have also been added. For example, banks are disallowed from assessing revaluation of pledged stock or disbursing differential financing amount against the same. While the condition may appear anti-borrower, it leads to a moral hazard where borrower is incentivized to partake in price speculation so that it may obtain additional bank finance, without procuring any incremental stock of wheat.

But most importantly, a central bank desirous of seeking operational independence must ask itself why its wheat procurement policy is still so perversely tilted in favour of government commodity operations. At the moment, there are no regulatory impediments in place that may compel SBP to support Food department’s goals at the expense of private sector buying, even though the latter may better aid the process of commodity price discovery. Is the central bank afraid of offending its biggest credit customer?