The economists see the troubled economy being taken hostage by the politics in the crisis-hit Pakistan where the cash-strapped government’s budgetary borrowings from the risk-averse banks have swelled beyond Rs 900 billion up to 16th of the current month.
According to central bank, from July 1 to March 16 the funds-starved government borrowed Rs 923.031 billion from the central and commercial banks to cater its ever-burgeoning budgetary needs. This shows a massive increase, in the government bank loans, of 116 percent or Rs 496 billion when compared with last year’s corresponding period. “The economy of Pakistan has been hostage to politics and the war on terrorism,” said senior economist Shahid Hasan Siddiqui. The economist said the PPP-led coalition government was prioritizing the War on Terror and was more focused on political face-offs with the judiciary or its rivals from the opposition or allied parties.
“If this situation is allowed to continue any further, there will be a disaster for the economy,” warned Siddiqui. The country will fast move towards an economic crisis, hyperinflation and a possible default in the payment of external loans,”
Having been denied funding from the IMF and other international financers and investors, the resource-constrained federal and provincial governments are heavily relying on domestic financing from the banks. During the review period, the government auctioned the heavily-weighted treasury bills, Pakistan Investment Bonds and Ijara Sukuk to raise Rs 235.548 billion and Rs 687.483 billion from the central and scheduled banks, respectively.
Despite government’s claim of not opting for the inflationary practice of borrowing form the State Bank, which makes the regulator print new currency notes, its borrowings from the SBP remained exorbitant and surged by 161 percent or Rs 145.174 billion compared to same period in FY11. The loans from the commercial banks, which are investing more in the risk-free government securities amid the current recessionary climate, also ballooned by 104 percent.
This heavy investment in the government securities has doubled the profits of the banks which, according to SBP, currently hold liquidity worth Rs 29.774 billion in excess to their Cash Reserve Ratio. The banks’ advances to private sector are reducing as a leading commercial bank counted its gross advances at Rs 248.135 billion in 2011, marking a decrease of nine percent over 2010. This, the bank observed, was “mainly on account of conversion of commodity financing/circular debt exposure to risk-free government securities”. The bank’s investment portfolio, however, increased considerably by Rs 103.6 billion over 2010 with higher concentration in the risk-free government securities. “What kind of banking is this? The banks are taking money from the depositors at 5 percent markup and lending the same to the government at around 12 percent interest,” said economist Siddiqui.
Given this situation, the economist said, the banks were in no need to extend advances to the growth-oriented but risky private sector when they were earning 7 percent without lifting a finger. “The State Bank should restrict the banks’ investment in government securities,” he voiced the demand also made by the banking stalwarts like Hussain Lawai, currently working as the president and CEO Summit Bank. If the banks current with their current risk-averse behavior, the economist said, who else would lend to the trade, industry and agriculture.
“Resultantly, the GDP growth would slowdown reflecting adversely on the employment opportunities,” said Siddiqui. The analyst said the politico-diplomatically-embattled democratic government would have to do away with downplaying the foreseeable economic disaster.
