EDITORIAL: Profitability of Pakistani banks rose to a record high of 126 billion rupees – up by 56 percent year on year in the first quarter of 2023.
The rise is easily explained: the heavy reliance by the government on deficit financing, borrowing domestically, a highly inflationary policy necessitated by a dramatic raise in its current (non-development) expenditure with minimal if any fallout on growth, coupled with Pakistan Investment Bonds (PIBs) emerging as a major borrowing source for the government with major banks as clients for this paper whose rate of return is linked to the discount rate announced by the State Bank of Pakistan (SBP) periodically.
On 23 May 2022, the discount rate was 13.75 percent which was raised to 15 percent on 7 July, maintained till 25 November 2022 when it was raised to 16 percent. That this situation has worsened considerably since end of first quarter of the current year is evident from the fact that the ninth review of the International Monetary Fund (IMF) is still pending which has throttled external inflows (borrowings) and with the discount rate at 21 percent as of 14 April it stands to reason that the government continues to issue PIBs to generate revenue which it then promptly injects into the economy that is a primary cause of inflation today on the one hand (which has reduced the capacity of the public to save in savings certificates, another source of government revenue, with the recent increase in the rate of return so far having a minimal impact on encouraging savings, given the April Consumer Price Index of 36.4 percent and windfall profits of banks on the other.
There is an argument that the government should levy some kind of windfall tax on the banks; however, such a tax may well dry up the only major source of revenue for the government at present.
A flawed policy that the incumbent finance minister appears to favour is to keep the discount rate low with a view to encouraging private sector activity irrespective of whether the rate is in the negative territory or not (with negative fallout on other key macroeconomic indicators); however, with the IMF pending review having critical implications on the country’s capacity to meet its debt servicing obligations as well as import bill the SBP has been compelled to raise the discount rate from 16 percent in November 2022 to 21 percent in April 2023 – projected to be raised further as a key condition as and when the Fund’s ninth review is implemented.
The negative implications of this policy decision include crowding out private sector borrowings, no doubt a reason for the negative 5.6 percent (July-February 2023) growth of large-scale manufacturing sector, due to a decline in credit to the private sector from 1199.3 billion rupees July-end March 2022 to 302.3 billion rupees in the comparable period of this year.
Thus the fault for the current state of affairs cannot be attributed to the previous government but to the flawed policies of the incumbent government that was forced to raise the discount rate so dramatically – a raise premised on its failure to check its current expenditure, which has risen by over 70 percent in this year alone. Today PIBs account for 20.9 billion rupees out of the total domestic debt of 34.3 billion rupees and this is indeed a source of concern.
To conclude, there is an ever-rising emergent need to undertake corrective policies instead of following the same ones as in the past, given that they did less damage in previous years not because they were successful but because the economy was in a less fragile state at the time.
Pakistan no longer has the luxury to withstand such heavy doses of flawed policies and one can only hope that remedial measures are taken immediately to stave off further deterioration.
Copyright Business Recorder, 2023
Comments
Comments are closed.