There is no short-term solution to economic ills. All political parties have to develop complete consensus on economic policies. Public financing and energy crisis are the two biggest impediments in growth and economic development of the country.
These observations were made by the Former Governor State Bank of Pakistan (SBP) and Dean, Institute of Business Administration Dr Ishrat Hussain. He was addressing the executive committee members of the Lahore Chamber of Commerce and Industry (LCCI) executive committee members here on Thursday.
Former central bank chief said, “It does not matter which political party is in the government, economic policies should remain consistent. Political leadership always tries to make popular decisions to keep everybody happy, but this strategy cannot work in economics. The government has to make harsh decisions.” Education and economy were two areas where short-term solutions were never possible, he underscored.
Speaking about the overall economic situation in the country, he lamented, it had become fad that everybody tried to criticise the government, but it could not be blamed for all economic problems. However, to address the high inflation the government had to put its house in order. Currency printing in result of state borrowing was the root cause of inflation, he stressed.
On mark-up, Dr Hussain said that business community should understand that discount rate was directly linked to inflation in the country. If the government reined inflation in, mark-up would automatically come down. “Businessmen always appraise me for maintaining the low mark-up regime during my tenure as SBP Chief, but I did not do anything out of the ordinary. I just catered to pressing market demands. We maintained low mark-up because inflation was hovering around three percent,” he pointed out candidly.
It was a common perception among the business community that banking spread in Pakistan was highest in the region, but it is not true. He indicated that SBP started Islamic banking during his tenure to resolve this issue, as a large number of the population wanted to avoid interest income. They preferred to keep their deposits in current accounts instead of time deposits. Whereas in other countries people liked to keep their savings in time deposits, which helped banks to reduce their margin, he maintained.
He further said that banks were still offering finance at merely half per cent plus KIBOR to corporate sector. However, for small and medium enterprises and agriculture the mark-up was higher owing to high risk. Number of borrowers had increased from one million to three million over a period of time, which indicated strength of banking system in the country, he added.
Speaking about the energy crisis, Dr Hussain said that the issue of circular debt could be resolved by issuing Pakistan Investment Bonds. The government had to make some difficult decisions. It had to empower the managements of power distribution companies, arrest the distribution losses and improve recovery mechanism. He pointed out that 1 percent distribution loss ate away Rs5 billion revenue which could not be justified. He indicated that some 33 per cent of energy was being consumed for ACs at subsidised rates. Over 70 per cent CNG was being consumed by those who could afford petrol. While on the other hand small industries were being closed due to the non-availability of power and it was the main cause of major increase in non-performing loans, he concluded.
