The second day of Lahore School of Economics' seventh Annual Conference on 'Management of Pakistan Economy' brought together a group of distinguished researchers and policymakers from Pakistan and internationally to discuss "Financial Sector Development and Management". Presentations and discussions at the conference focused on the topics of growth, macroeconomic management, monetary policy and financial sector reforms.
Dr Mathew McCartney from School of Oriental And African Sciences (SOAS) University College London noted that GDP growth in Pakistan is typically argued to be dependent on external factors such as trade and financial flows, but a detailed analysis of the growth and stagnation episodes in Pakistan's history does not support this view. He stated that disappointment with Pakistan's growth should turn attention not to fatalism about the world economy but to domestic policy and governance reform.
Dr Hamza Malik, Director State Bank of Pakistan SBP gave an overview of the process of monetary policy formation and management at the central bank. He stated that despite the stated dual objective of growth and price stability in the SBP Act, the main objective of monetary policy formation in recent years has been price stability. Main monetary policy instrument used by the SBP is short-term interest rates (over-night lending and deposit rates). However, in practice, government borrowing from the central bank also affects monetary policy significantly, he added.
Dr Hamza further said that the reforms proposed under new SBP Act are designed to put a limit on government borrowing for SBP and set-up an independent monetary policy formation committee. Such reforms are essential to ensure that the SBP can actually achieve its objective of ensuring price stability and controlling inflation. The issues of capital markets, their performance and governance were also discussed, he maintained.
Dr Hasan Mohsin from Pakistan Institute of Development Economics (PIDE) in his paper examined the extent of interest rate pass through of SBP policy rate on commercial banks' lending and deposit rates. The results show that while the lending rates are correlated with the policy rate, deposit rates offered by banks are not. The pass-through effect of lending rates is the highest for nationalised banks, followed by private banks and then foreign banks.
In his address, Dr Eatzaz Ahmed, Dean of Faculty of Social Sciences and Professor of Economics at Quaid-e-Azam University presented a quantitative analysis of Pakistan's external and internal debt. He stated that government of Pakistan has not felt much pressure to use domestically borrowed funds on development activity despite the fact that the volume of domestic debt is almost equal to the volume of foreign debt. Moreover, salaries of government employees have recently adjusted for inflation and the law and order situation demands even further spending.
Also, governments have little option but to cut development expenditure to make room for debt servicing. But unfortunately, he asserted that options are shrinking rapidly as the share of development expenditure has already been reduced drastically over the past several years.
Speaking on the occasion, Dr Athar Maqsood from Nust Business School and Wasim Shahid from Quaid-e-Azam University, in their paper estimated a monetary policy reaction function for Pakistan. The results show that State Bank of Pakistan reacts to the changes in inflation rate and economic activity in a way that is consistent with the Taylor rule of monetary policy setting, which is based on explicit objectives of interest rate smoothing and exchange rate management.
Ayesha Afzal and Nawazish Mirza, from Lahore School of Economics, presented empirical evidence of market discipline using a panel data set of listed banks at the Karachi Stock Exchange. The authors found significant relationship between their risk factors (such as market risk, size and value premium, default likelihood) and cost of deposits indicating the bank align deposit compensation with the risk perception of the bank. These findings have important implications for policymakers as market discipline could compliment the regulatory role of state and lower the cost of supervision.
Nawazish Mirza and Mahreen Mahmud from the Centre for Research in Economics and Business (CREB) at Lahore School of Economics in their paper examined the performance of the mutual fund industry in Pakistan in its growth period from 2006-10. The data reveals strong growth of Islamic funds in spite of lacklustre performance as compared to conventional funds such as income and stock funds. No fund manages to outperform the market but the growth trend indicates a promising future for this industry that can help provide saving options to private investors.
Hamna Ahmed and Dr Naved Hamid from CREB in their study, 'Financing Constraints; Determinants and Implications for Firm Growth in Pakistan' find that access to finance is binding constraint to firm growth in Pakistan. Financial depth is important for access; and within the country, access is better where there is greater penetration of financial infrastructure. Moreover, a range of firm-specific factors such as size, export status, quality of human capital and organisational form emerge as important determinants of external financial access in Pakistan.