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profit.com.pk
Saturday, 14 April, 2012
TIMELY THREAT
SBP puts its wallet on the table and points towards the Parliament Govt has to justify huge budgetary bank borrowings in Parliament, SBP reminds economic mangers g Policy rate kept unchanged at 12 percent g Minimum profit rate on saving/PLS saving rupee accounts hiked to 6pc g Inflation to remain in double digits even in FY13 g Government rolling over its maturing short-term debt is a Herculean ask g
KARACHI
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ISMAIL DILAWAR
He State Bank of Pakistan (SBP) tends to refer the cashstrapped federal government to the Parliament if the latter failed to meet the legal requirement of zero quarterly borrowings from it as provided in the State Bank of Pakistan (amendment) act (2012). Friday saw SBP’s Central Board of directors issuing its Monetary Policy Statement for next two months of FY12. Keeping the discount rate unchanged at 12 percent, the bank decided to raise the minimum profit rate on Rs saving/PLS saving products from 5.0 to 6.0 percent. From May 1st (2012), the banks would be required to pay a minimum profit rate of 6.0 percent on their saving/PLS saving products maintained in Pak rupee. “it was the expectation of SBP that these deposits will respond to market forces and adjust accordingly,” the bank said. also, the regulator raised a serious question about the revival in private sector credit and growth prospects in the country wondering that how would the funds-starved government rollover its maturing short-term debt and raise additional financing while simultaneously retiring its borrowings from the SBP? it reminded the government of the State Bank of Pakistan (amendment) act (2012) that requires the former to repay its borrowing from the SBP at the end of each quarter and the existing stock was to be retired within eight years. “in case of not observing these provisions, the act also stipulates that the federal government will submit a statement to the Parliament giving detailed justification,” the SBP said.
Seeing more inflationary borrowings from the State Bank as a “most likely avenue” for the government given shortfalls in external sources, the central bank warned that adherence to this very legal requirement, without serious adjustment in the fiscal position, would lead to significant injections of liquidity by the SBP to keep the payment system functioning and financial markets stable. The government borrowed Rs 373 billion from the scheduled banks and Rs 218 billion from the SBP during July–March 30 (FY12), marking a growth of 56.5 percent and 18.5 percent, respectively. The private sector credit, on the other hand, could grow by only 4.2 percent and that in total deposits of the banking system was 17.4 percent. “The banks continue to prefer financing the fiscal deficit as opposed to searching avenues, taking risk, and building partnerships to facilitate credit to the private sector,” the SBP noted with concern. The SBP, it said, was already injecting substantial short-term liquidity in the system, Rs 200 billion as of 13 april 2012, which was being continuously rolled over. Thus, simultaneously meeting the legal requirement of zero quarterly borrowings from SBP, scaling back liquidity injections, effectively anchoring inflation expectations, and creating space for the private sector, could prove to be a much more difficult task than appreciated, it added. The State Bank warned that not all challenges currently facing the country could be tackled by the monetary policy alone. a supporting fiscal strategy and an active economic reform agenda was critical to deal with some of the struc-
tural issues, in particular, low tax to GdP ratio and energy shortages, the central bank proposed. “The economy needs a forwardlooking approach to policymaking with strict adherence to rules laid out in the legal frameworks, be it the State Bank of Pakistan (amendment) act (2012) or Fiscal Responsibility and debt Limitation (FRdL) act (2005),” it added. The bank said its primary consideration was to bring further down inflation which it said, like last few years, would remain in double digits in FY13. “Consistently growing government borrowing requirement from the banking system is a key variable that is adversely affecting the inflation outlook,” it said adding weak private demand, on the other hand, was one reason why inflation was not increasing sharply. elevated international oil prices, weak quantum of exports and insufficient foreign financial flows require careful management of the external position. “Last but not least, the consistent decline in private investment is also an important factor in formulating the monetary policy strategy as it impacts both the medium term inflation, growth and employment prospects,” said the regulator. Following this approach is crucial in anchoring inflation expectations around the medium term targets of 9.5 percent for FY13 and 8 percent for FY14 as envisaged in the Medium Term Budgetary Framework (MTBF) of the government. another risk factor that, the SBP said, needed close monitoring for assessing inflationary pressures was the behaviour of international oil prices. Government borrowing requirements are not the only source of liquidity
pressures. With a gradually rising external current account deficit and consistently declining foreign inflows, the SBP’s foreign exchange reserves are on a declining path. during the first eight months of FY12, the external current account deficit was $3 billion while the net capital and financial account receipts were only $187 million. The SBP’s dollar reserves declined to $11.8 billion by end-March 2012 from $14.8 billion at end-June 2011. These external sector developments are exerting downward pressure on rupee liquidity as indicated by a 21.4 percent year-on year decline in net Foreign assets (nFa) of the banking system by end-March 2012. “Thus, some rupee liquidity injection and increase in reserve money is required to facilitate normal transactions taking place in the economy.” Given substantial external debt payments, declining trend of export quantum, elevated international oil prices, and weak financial inflows, the external position the bank said was likely to remain under pressure in the remaining part of FY12 and FY13. Predicting a “substantial slippage” compared to the revised GdP target of 4.7 percent, the SBP said as provisional financing data the fiscal deficit may have reached 4.3 percent of GdP during the first nine months of FY12. “in terms of solutions, the economy needs deep and decisive fiscal and energy sector reforms and an early realization of planned foreign financial inflows to mitigate uncertainty,”, it suggested. improving financial deepening and competition in the banking system is another area of reform the regulator proposed.
COMMENT
Goodwill in New Delhi
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He successful launch of Life Style Pakistan in delhi marks another important chapter in what has become trade normalization on steroids, a rapid thawing of one of South asia’s most enduring rivalries. and as significant as it was for anand Sharma’s landmark announcements, rather pronouncements, it was even more important for what must already be afoot behind the scenes. Trade bodies, business executives and corporate bigwigs have not travelled all the way just for photo ops. They are eager to fine tune all proceedings that will stem with the phasing out of our negative list as the year rolls out. in negotiations taking place right now, lasting alliances will be built and new opportunities identified, and exploited; good networking all in all. Those weary of the rapidity of the change must also leverage the present engagement to iron out rigidities where they exist and posture to better harness gains of trade when they begin materializing. There was a justified touch of irony in Sharma’s words when he talked of many past opportunities lost to bitterness, of the duty to bring change for the sake of our children. There seems a clear understanding on both sides – there is no going back; this must succeed. now that irreversible financial linkages are as good as forged, the new strategy will be tested on the political front, and rightly so. Proponents of the new engagement staked their case on one simple argument – when bound together in long term, high value projects, there will be a clear desire to keep otherwise bothersome issues from disrupting the peace, which in turn would demand serious attention towards lasting solutions. and that is the real success of the endeavor our commerce ministry has been pursuing for the good part of the last two years. There is progress beyond india, and meaningful progress at that. We stand a better chance of improving trade and diplomatic relations with many countries in our neighbourhood. However, we will need to work on improving just about everything about our exports at the moment.
NEIGHBOURLY LOVE-IN CONTINUES
Love thy neighbour, and also give FDI a thought India agrees upon allowing foreign direct investment from Pakistan Pakistan, India to discuss opening of Khokhrapar route next month Second gate of Wagah Atari inaugurated India to reduce sensitive list under SAFTA protocol within four months Indo Pak Business Council to facilitate the bilateral trade: Anand Sharma India, in principle, to allow FDI from Pakistan n
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NEW DELHI GHULAM ABBAS
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ndia has “in principle’’ agreed to allow foreign direct investment (Fdi) from Pakistan into the country as part of the roadmap to enhance economic engagement between the two nations. He said the procedures and the necessary requirements for allowing Fdi from Pakistan were under the formulation stage and would be notified very soon. indian Commerce Minister, anand Sharma announced that the india-Pakistan Business Council will be set up soon to be co-chaired by both the countries. His counterpart Makhdoom amin Fahim Fahim said ``We have also decided to open up negotiations in the hospitality, education and tourism sectors and experts groups would be constituted on these issues to work out the modalities for talks,’’. Pak-
istan and india, the two neighboring countries, which have opened a new gate at Wagah atari land route on Friday to facilitate the bilateral trade, will start negotiation on opening another route at Tharparkar at secretary level talks next month. This was said by Shri anand Sharma, indian Minister for Commerce, industry and Textile in a media briefing here at his office on Friday after a bilateral meeting with visiting Pakistani Commerce Ministers, Makhdoom amin Fahim at Udyog Bhavan. amin Fahim was currently heading a hundreds of businessmen led delegation to delhi. The two ministers were accompanied by commerce secretaries, officials and other dignitaries of the two countries. While replying to a query, anand Sharma said that new linkages should be developed between the two countries to increase the movements of goods and cargo across the borders. Khokhrapar was already
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in the agenda of the secretary level talks to be held in May this year. Various prospects of the new route would be discussed in detail by the two secretaries and concerned officials, he said. To another question the indian minister said that his country was committed to reduce the sensitive list of trade under the SaFTa protocol within next four months. He said that following the pro-active steps taken by Pakistan, india would also carry out a review of the 30 per cent of the ``sensitive list’’ as a confidence building measure. Replying to a query Makhdoom amin
Fahim said that the government was finalizing the MFn related issues and as the cabinet has approved the matter, there was no problem or hindrance in granting the status to india. He said the process was successfully being finalized by the secretaries of the two countries. Fahim said ``We have also decided to open up negotiations in the hospitality, education and tourism sectors and experts groups would be constituted on these issues to work out the modalities for talks,’’. He said that
the two countries have agreed to have the banking facility to businessmen on both sides and central banks of the two countries were working on it. The indian Minister also informed that both the countries have also agreed in principle to allow opening of bank branches to facilitate financial transactions and ensure smooth trade. Both the Reserve Bank of india (RBi) and the State Bank of Pakistan have held several rounds of talks in this direction and a very positive situation has emerged. ``Both RBi and State Bank of Pakistan are in favour of opening up of branches on both sides of the border,’’ Sharma remarked. Later, both the ministers left for attari-Wagah border near amritsar to inaugurate the second integrated Check Post (iCT) gate that would pave way for smooth flow of road traffic and provide upgraded and modern infrastructure for both traders as well as people passing the border through the land route.