‘Corporate debt market in the offing’


State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP) are finalising modalities to launch the long-awaited corporate debt market in the country. “I have started with the chairman SECP in a weekly meeting of Coordination Committee where we have been able to work on the launching of the corporate debt market so to develop corporate debt market,” said Governor SBP Yasin Anwar in an exclusive interview with Profit. The complete interview will be published in Monday’s issue of Pakistan Today.
“You have the ICI, Glaxo and others to tap the market themselves as opposed to going to the banks, which have captive audience. They can charge this KIBOR plus or whatever it is,” SBP Governor further explained the corporate debt plan.
The investor from corporate sector would be able to go to the market themselves and fund their own portfolios. They don’t need to depend on banks anymore,” SBP Governor added.
Once it happens, these banks would have to find new products and would go to SMEs that would automatically generate and increase economic activity thus growth in the country, he said. The banks’ extra liquidity would then be directed to the agriculture and house financing sectors, he said, adding the country’s legal system and the laws pertaining to financing sector had also got problems. And within next one or two years the corporate debt market and legal process were going to get into conversion of this areas into more robust lending ensuring the realisation of the engine of growth for this country. Anwar, an optimist who sees the glass half full, views housing finance, Small and Medium Enterprises and agriculture as the three pillars of engine of growth in Pakistan. Terming the “documentation and technology” as two prerequisites for the SME lending, the governor said agriculture in Pakistan, representing 45 per cent of the work force and 21 per cent of GDP, has a huge untapped potential. About house finance, he illustrated that the outstanding loans to housing finance in Pakistan stood at only one per cent of the GDP compared to 65-70 per cent and 110 per cent, respectively, in the US and the UK. Reasons being the fixed income market does not exist in Pakistan to provide that 25 to 30-year money.


“We have a difficult environment as it is in the world media where the media projects us as a nation that is fraught with a terror and law and order crisis, but that’s an exaggeration. We know that the foreign media is elevating this to a level which is unjustifiable,” he said. SBP Governor said life was very normal in Pakistan except some urban centers or the north-western parts of the country that were plagued and pockets of disturbances were there, which was a common phenomenon in many urban cities around the world. So it’s not alien and the business environment has huge potential, the banking sector is very resilient we are not faced with the crisis that is being faced by many other countries around the world and that is because of a sound banking supervision, he said.


“I see going forward in terms of the dark clouds and the silver linings that we have in these dark clouds also. I am an optimist and see the glass half full, and that’s the only way I feel we should go forward to build bridges and cover up those potholes or those bumps that we see on the road ahead,” he further explained. Now currently we have GDP at 3.8 per cent which is considerably better than what it was 2.4 per cent last year and naturally it is not as high as we would like to see, but we headed in the right direction, Yaseen Anwar said.
He said: “As far as our concerns or the challenges we have, is that we have a current account deficit that is a concern and I am not comfortable with it. We had a surprisingly small current account surplus last year that was because of fortunately very good prices of cotton which have picked up our exports but what it has dropped very quickly because the prices of cotton declined much faster than anybody had expected. We were not expecting it to get to this level so quickly, naturally, what does that do is to create an impact on our balance of payments, our reserves because that shortfall has to be met somewhere.” If you don’t get the inflows in, so that is where my second concern is. The inflows that we expect must be realized in order to reach our targets by the end of the year. We still have five-six months left so and I don’t want to predict that we will or will not reach it, that is challenging and the targets and those inflows are relating to Coalition Support Fund (CSF), 3G license to PTCL and of course the remittances and the latter one has been very steady as you know we have averaged to get about a billion dollars a month. During first half it’s little over $6 billion marking an 18 per cent increase during six months, July-December FY2012. That has been very healthy.


And some people talk about a mystery. They wonder why the remittances have been going up over last three years. So I said this before and I said this in front of Finance Committee when I was asked. If anybody was in international banking and know international money transfer business then this word mystery would never be used as that means it’s not understood. Very simple, in January 2008 there were two exchange companies that were shut down [Zarco and K&K (Khanani and Kalia)] if we assume that the pool of both formal and informal flows of remittances amount to, let’s say hypothetically I am just choosing the number, $20 to $25 billion. At that time we had inflows of $67 billion so by logic the rest of it would be informal sector right. On January 1, I issued a circular to all the exchange companies and banks that any exchange company that is operating with its counter party in overseas that counter party must be regulated by the local regulatory body or agency like State Bank or its counterpart over there in England, UAE etc.
That was a major restriction or condition that we put on. Thirdly, we launched what called the Real Time Gross Settlement (RTGS); a software program that in fact I was asked to set it up as I had an experience of the US payment systems so it is something that I had to get an approval from Islamabad. Deeming the payment business a very important segment of an economy, we launched RTGS that allows us to transfer a $100 from New York to Muzaffarabad in a matter of few minutes to the beneficiary’s account. So the launch if this allowed the smooth flow and efficient transfer which could compete effectively the quick transfer of hawala or the informal trade business. So now the beneficiary’s account gets the money quickly.
Fourthly, I instructed my inspectors to elevate their inspection of the exchange companies to make sure that the compliances are being followed. The combination of these steps what it did is very simple forced an undisciplined environment into a more disciplined flow of the moneys coming from both the informal and formal channels. That’s why it’s now $12 billion target and we would meet it I think. Plus we also have created incentive mechanism that encourages those money changers abroad to send it through formal channels, so we give rebate under the incentive formula. So that is where we get $12 billion out of that 20 billion it means the pool may be the same for argument’s sake.


On uncertainties on CSF and 3G license, I don’t want to say for sure that these will or will not come in on the CSF and others the federal government is optimistic and I have to support that optimism but at the same time one has to be realistic as well. Given the current environment I am a conservative banker so you have to hedge and supposing you do a sensitively analysis you go through the worst case scenario to be prepared so you have to ratchet up another side of the equation to make sure you try and balance that fiscal deficit.


Three major challenges we have, one, is the revenue side that is a key, secondly it’s the balance of payments, and third private sector credit. The fiscal revenue target is Rs1952 billion, attached to GDP ratio of nine per cent we need to be somewhere up north of that. Our expenditures are still naturally going up with the revenue side needs to go up expediential higher than what it has been. Now if the inflows don’t come in, let’s say hypothetically, by 50 per cent say only $400 million come of the $800 million from the Coalition Support, we have got payments of the IMF $1.2 or $ 1.3 billion has to go out during this second half keep in mind it is not next month, people keep saying its next month it is in second sometime, I believe, in April or May. “But we have already budgeted that in our calculations, so we don’t see an impact of that as far as our forecast is concerned for fiscal deficit and the current account position,” As far as other inflows are concerned, if they don’t come in at the levels that were talking about the yes we will be hit on our reserves position,” The governor, however, refrained from giving a number indicating towards the level of fiscal imbalances.