Majyd Aziz
(Former President Karachi Chamber of Commerce and Industry and Chairman SME Bank Ltd)
(Presented at the Seminar organized by Daily PAK BANKER at
Carlton Hotel Karachi – 20140206)
PAKISTAN is one of those countries that are for decades mired in an
intricate economic quagmire and it is frustrating and tough to extricate the
country from this difficult situation. Heavy reliance on financial resources
from international development institutions, unbridled imperialistic spending
extravaganza, and maintaining a pathetic Tax-to-GDP ratio has always compounded
the dire economic scenario. Moreover, the inability of economic managers,
whether they are plucked from the domestic environment or imported from abroad,
has also intensified the dire situation. At the same time, it has also been a disturbing
concern of economic stakeholders that the banking sector has been less of a
facilitator and more of a lending channel to government to balance the
unmanageable budget deficit. This narrative, in short, will continue as the
status quo during 2014.
The present government has highlighted three E’s as its priority.
Energy, Economy and Extremism. In reality, the three E’s should be Energy,
Energy and Energy. The chronic and insurmountable energy deficiency is today
Pakistan’s biggest challenge, not only for 2014 but for some years hence.
Projects have been announced and there is the usual urgency demonstrated, but
the fact of the matter is that every new and high-profile energy project is
still years away. The launching of Thar Coal was done recently and again the
hype has been created as if the coal would be extracted in a few months and
energy would be flowing from the area. At the same time, Pakistan’s position
was damaged when the erstwhile government, in its last weeks, staged an
extravaganza at the Iran-Pakistan border and announced the launch of the
Iran-Pakistan Gas Pipeline. Both the governments knew that the international
sanctions on Iran precluded any progress on the Pipeline. Last year, according
to CIA World Report, Pakistan’s gas reserves depleted by about 100 billion
cubic meters. Precious gas resources have been wasted on CNG and providing it
to domestic consumers. The European Union’s decision to grant GSP Plus status
to Pakistan was applauded by all as the answer to Pakistan’s economic ills. But what no one cared to mention was that Pakistan
does not possess the critical mass to take maximum advantage of this trade
facility. The energy shortage is and will be the main roadblock.
The second challenge critical for the country is the rapid decline in
the foreign exchange reserves. The stagnation in exports and the burgeoning
import regime has played havoc with the foreign exchange reserves. The
government continues to include the foreign exchange held by banks and private
accounts and this naturally does not reflect the actual disastrous scenario of
the foreign exchange regime. Pakistan’s Forex reserves continue to slide down
and as on January 24, 2014 had gone below the $8 billion threshold. The
dependence on the loans from international development institutions such as
IMF, World Bank and ADB, is proof positive that the economic management of the
country is a compound of fiscal indiscipline, wasteful expenditure, unbridled outlay
on populist measures that are routinely misused, gross incompetence of the
Federal Board of Revenue, and drain on the country’s scarce resources by the
losses of the state-owned enterprises. As has been the case in the past, the government
again entered the portals of IMF to negotiate another bail-out. However, the
inflow of remittances from the expatriates does allow ammunition to the
government to handle the foreign exchange requirements. Pakistan’s Debt
Servicing scenario is a matter of great consternation too. The external debt
and liabilities of the country as on September 30, 2013 was in excess of US$ 60
billion while Public Debt was over Rs 15 trillion. The government has also
violated the provisions of the Fiscal Responsibility and Debt Limitation Act
2005 by breaching the limit of Debt-to-GDP ratio as Public Debt exceeded the
limit of 60% as on June 30, 2013 and reached the level of 62.70% of GDP. In 2010/11, the country paid Rs 807 billion
as interest and Rs 210 billion as principal. In 2011/12, the amount was Rs 972
billion and Rs 294 while in 2012/13 the Treasury paid out Rs 1053 billion in
interest and Rs 489 billion out of outstanding principal. Moreover, it is
estimated that during this fiscal year, the government’s import bill would
consist of 39% for petroleum products, 18% for agriculture and chemicals, 13%
for machinery and 12% for food.
Another challenge faced by the country and which keeps on impacting
negatively on the country’s progress is the unending threat of domestic as well
as foreign terrorists and extremists. The Global War on Terror persists to
erode the country’s economic resources with no end in sight. The recent
initiative to hold parleys with Taliban may introduce a lull in the dastardly
acts but there is no guarantee that the truce, if it occurs, would be longer
lasting. The secessionist movement in Balochistan and the rumblings in other
areas of the country would also affect the country’s march towards prosperity.
The year 2014 also promises to be a challenging time for the banking
sector. 2014 would again see the banks becoming the proverbial piggy bank for
the government to finance its budgetary deficit and to finance the various
populist measures announced by the government. The banks will oblige the
government because of the safety mode of lending to the government but this
would be detrimental to the financial needs of the private sector. The financing
of the populist measures, such as the Youth Scheme, may take a heavy toll for
those banks that have been mandated by the government to finance the scheme and
advance the required loans. So far, none of the private banks have indulged in
this adventure except of course National Bank as well as First Women Bank. The
latest situation is that the investment of scheduled banks as well as
non-banks, such as insurance companies etc, in Pakistan Investment Bonds is Rs
1380 billion, GOP Ijara Sukuk is Rs 370 billion and Market Treasury Bills is Rs
3181 billion. The breakup is Rs 3815 billion by scheduled banks and Rs 1116
billion by non-scheduled banks. Moreover, the tough inter-bank competition for
deposits would compel the banks to conjure up new products and announce new
attractive offerings to the depositors. According to the State Bank of Pakistan,
savings by the lowest income group has virtually vanished apparently due to the
high food cost and other inflationary reasons. The middle class is also
constrained by inflation from becoming a major saver. This may impact on the
profitability as well as on the cost of borrowing. The percentage of
Non-Performing Loans would bear heavily on banks and it would continue to be a
hard nut to crack. The NPL of NBP rose from Rs 4.5 billion in the first nine
months of 2012 to Rs 12.14 billion in the first nine months of 2013.
The micro-finance banks as well as leasing institutions are going to
have a tough 2014 and in the future. It just does not make good business or
economic sense to finance projects in SMEs and micro or cottage industries
through borrowing from micro-finance banks and paying a high mark-up. Thus most
of the lending is to the agriculture sector. The advent of what is referred to
as mobile banking has enabled the micro-finance banks to attract good deposits.
Yet, much more needs to be done to broad-base the lending and this can best be
done by revisiting the mark-up rates by making it more feasible and easier to
bear.
Takeaways:
- There will be more reliance on online banking and use of cell phones for banking purposes would see a marked increas
- · Banks would enhance their Islamic banking activities as there would be more reliance of Islamic financial instruments primarily due to those borrowers who at present are wary of conventional interest-based banking but now need to finance their business activities.
- · Banks must collectively invest in setting up a security force that is highly trained, is proficient in handling arms and ammunition, and is better remunerated than what the private security agencies are paying the guards
- Banks must ensure that the branches have latest security apparatus unlike the ones used presently that do not provide the desired images and CCTV coverage
- Banks must be ordered to clean up their infected portfolio starting from this year and ensure that efforts are made to recover stuck-up or dormant loans
- Expenditure on bank branches would result in a substantial cost to the banks and many branches would maintain their cost-wise negative impact on the balance sheet
- It should be made obligatory on banks to improve their services, make their staff more productive, boost up staff efficiency and aptitude, and provide the staff with soft skills to deal with the customers
- Government would continue to be the biggest borrower and banks would be inclined to lend more to the government
- It must be made mandatory that State Bank of Pakistan hierarchy refrains from attending too many conferences and seminars around the globe as the presence of the hierarchy is more crucial at home rather than networking to boost up personal career portfolios. This has been the normal practice of SBP hierarchy to frequently attend time-wasting and meaningless conferences and junkets
- The State Bank of Pakistan must have autonomy in the true sense to carry on its designated functions and to actually become a Central Bank rather than an auxiliary division of the Finance Ministry
- 2014 would be another demanding year and the onus would lie on the Finance Minister to present a revolutionary Federal Budget rather than the mandarin Budget that has been a routine affair since the days of Ghulam Ishaq Khan when he would take hours to read the whole Budget speech in the Assembly
A voice of reason in the wilderness; keep it up Mr. Aziz
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