THE annual monetary targets set for 2005-2006 were exceeded by March 16, three and a half months before the close of the financial year. Credit to the private sector has shot up to Rs330.4 billion, surpassing the estimate of Rs330 billion for the whole year. Government borrowings have swelled to Rs155.9 billion against the target of Rs98 billion. The rapid monetary growth has pushed the advance-deposit ratio of commercial banks to 77 per cent, close to 80 per cent considered to be the maximum ceiling for lending by by leading bankers. The record monetary growth has taken place despite a tightening of the monetary policy by the State Bank, indicating the growing demand the private sector credit which is fuelling economic growth.
The targets set by the State Bank for annual credit expansion do not carry any finality, as these estimates are dependent on a host of variable factors that determine the performance of the economy. For example, the expansion of the foreign trade sector has far exceeded official estimates, as is evident from a negative growth of foreign assets of Rs 94 billion as against the targeted increase of Rs 15 billion. Unlike many other economies awash with excess money without sufficient productive outlets to channel it, Pakistan’s massive imports of raw material and capital goods supported by liberal credit are helping to keep the wheels of the economy moving at an internationally competitive pace. Money is now being channelled into hitherto credit-starved sectors like agriculture, SMEs and consumer financing, including housing loans. Non-corporate borrowings are estimated to have risen to a recent estimate of 45 per cent of the total bank credit. Government borrowings exceeding the annual target can be attributed to an enlarged public sector spending on urgently needed modernization of physical and social sectors to sustain the momentum of private investment and the unanticipated expenditure on relief of earthquake victims.
No doubt, normally the success of a monetary policy is judged by a high economic growth combined with a low rate of inflation as in the case of our neighbours, China and India. Going by the statement of the Governor of State Bank, Dr Shamshad Akhter, “inflation is coming down” as a result of a “substantial tightening of monetary policy” and “easing of supply shortages.” Perhaps, a high inflation rate — a source of major public concern — can be largely attributed to market abuse by the sugar, automobile and cement industries. The cartels need to be curbed for inflation to be brought down, for tight monetary policy alone cannot do that. Inflation can also be brought down by encouraging savings. Commercial bank lending rates are above the inflation level and increased the net interest incomes of banks by 70 per cent in 2005. The increasing spread between lending and deposit rates at 7.2 per cent in December 2005 as against 5.45 per cent a year ago indicates that bank profits are not because of efficiency but are being earned at the cost of the depositors. A further hike in the interest rate may not be advisable as enhanced financial charges tend to discourage investment. Perhaps, a better way would be to increase the mandatory cash reserves to be kept by the commercial banks with the central bank. The State Bank needs to have a fresh look at its monetary policy.