SBP governor explains 150bps rate cut
KARACHI: Days before Yaseen Anwar took oath as Governor, State Bank of Pakistan; the central bank slashed the discount rate by 150 basis points. In his first interview with any media outlet since taking charge of country's central bank on October 20; Yaseen Anwar revealed to Business Recorder, the rationale behind this policy decision.
"We saw positive real interest rates of 150 basis points" Anwar told BR, adding that SBP data showed "benign" inflation in preceding months and projections for the upcoming months also depict softening in the trend of rising prices. While the governor is staunchly opposed to negative real interest rates, such as those in India, and many other economies at present; he said that this cut in policy rate "presented an opportunity" to lower the cost of borrowing and spur growth.
Explaining the surge in the country's import bill witnessed in September he said, "we had just experienced a very substantial sum of oil payments under deferred payment L/Cs that had caused some inflationary effects earlier". But central banks are always forward looking and base their policy decisions on trends; not one-off events. Hence the monetary policy committee of the central bank decided to cut the discount rate.
Listing the benefits of this reduction, he said that smaller banks would be able to attract funds at relatively lower rates, the incidence of non-performing loans will likely come down and private sector's demand for credit may also improve.
The hefty reduction in the discount rate was well received by the private sector and local stock exchanges rallied after the monetary policy announcement. But any assumption (such as those that have done rounds in some media outlets, of late) that the new governor is a dove, couldn't be farther from the truth. "Banks are not properly performing their role of being financial intermediaries" conceded Anwar. The governor has a plan that could force local banks out of their present slumber, parking excess liquidity into government treasury securities.
SBP Governor, Yaseen Anwar believes that the absence of an efficient corporate debt market in the country is partially responsible for fiscal mismanagement in the country as those in need of financing do not have a market where they can obtain funds in a competitive environment. He revealed that plans for the establishment of a corporate debt market have already been stepped up, adding that in consultation with the Securities and Exchange Commission of Pakistan; a six-member committee will be set up for this project. "All you need are four market makers who have the depth and the breadth to originate and distribute paper" he said, explaining that the regulatory requirements and documentation for this project will be completed alongside other preparatory work for this endeavour.
He said that the market will start from short-term instruments and gradually move into long-term instruments for up to 30 years. The SBP governor added that this "will create an opportunity for blue chip companies to forget about the banks and go straight to the capital market themselves". The central bank intends to set up a secondary market for corporate debt, once the primary market is established.
The SBP governor contended that this will also force the banks to move into other offerings. "What happens if government borrowing goes to zero" he asked rhetorically. "Banks are not prepared right now to go into SMEs, agriculture and housing; which is where I want them to move since that is where our national interest lies" he said.