Negative reaction: Cost of borrowing to rise, says economist
Central bank leaves discount rate unchanged.
KARACHI:
The cost of borrowing funds faced by the private sector will rise despite the central bank’s decision to hold its policy rate unchanged, say analysts.
“In essence, the State Bank of Pakistan (SBP) has convinced the government to stop borrowing from the central bank and start borrowing more heavily from commercial banks instead,” said senior economist AB Shahid.
Shahid pointed out that the government has failed to curtail expenditures and raise revenues. “In the absence of any moves towards curtailing the fiscal deficit, the government will have no choice but to continue financing this deficit through domestic borrowing,” he said.
In its monetary policy statement unveiled on Saturday, SBP Governor Shahid Kardar announced that the government has agreed to limit its borrowing from SBP to “below the September stock of Rs1,290 billion”. Kardar also announced that the discount rate would remain unchanged at 14 per cent while the cash reserve ratio and statutory liquidity requirement would remain at five per cent and 19 per cent, respectively.
AB Shahid stressed that higher reliance on commercial banks for deficit financing by the government will “further limit the availability of credit to the private sector.” He believes small and medium enterprises (SMEs), which form the backbone of the country’s economy, are finding it hard to obtain loans on favourable terms from commercial banks.
“Commercial viability of loans and credit to the SME sector has reduced due to factors such as increased risk of doing business and rising cost of inputs,” said Shahid, adding that most of these factors are exogenous to these businesses and it is the government’s job to create an enabling environment for commercial activity.
“This will give some short-term breathing space to the private sector but down the line, the central bank will have justification for an even sharper increase in the policy rate than the recent hike of 50 basis points,” said InvestCap Head of Research Khurram Schehzad.
The central bank has said it will review the government’s performance in coming weeks, ahead of the next policy announcement at the end of March. “The only mentionable good development in the first half of the current fiscal year has been the inflow of $633 million from the coalition support fund,” said Schehzad.
He contended that macroeconomic indicators such as inflation have not improved significantly while the government has failed to increase its revenue base. He said that two months will pass like a breeze unless the government shows an unprecedented level of seriousness.
Published in The Express Tribune, January 30th, 2011.
The cost of borrowing funds faced by the private sector will rise despite the central bank’s decision to hold its policy rate unchanged, say analysts.
“In essence, the State Bank of Pakistan (SBP) has convinced the government to stop borrowing from the central bank and start borrowing more heavily from commercial banks instead,” said senior economist AB Shahid.
Shahid pointed out that the government has failed to curtail expenditures and raise revenues. “In the absence of any moves towards curtailing the fiscal deficit, the government will have no choice but to continue financing this deficit through domestic borrowing,” he said.
In its monetary policy statement unveiled on Saturday, SBP Governor Shahid Kardar announced that the government has agreed to limit its borrowing from SBP to “below the September stock of Rs1,290 billion”. Kardar also announced that the discount rate would remain unchanged at 14 per cent while the cash reserve ratio and statutory liquidity requirement would remain at five per cent and 19 per cent, respectively.
AB Shahid stressed that higher reliance on commercial banks for deficit financing by the government will “further limit the availability of credit to the private sector.” He believes small and medium enterprises (SMEs), which form the backbone of the country’s economy, are finding it hard to obtain loans on favourable terms from commercial banks.
“Commercial viability of loans and credit to the SME sector has reduced due to factors such as increased risk of doing business and rising cost of inputs,” said Shahid, adding that most of these factors are exogenous to these businesses and it is the government’s job to create an enabling environment for commercial activity.
“This will give some short-term breathing space to the private sector but down the line, the central bank will have justification for an even sharper increase in the policy rate than the recent hike of 50 basis points,” said InvestCap Head of Research Khurram Schehzad.
The central bank has said it will review the government’s performance in coming weeks, ahead of the next policy announcement at the end of March. “The only mentionable good development in the first half of the current fiscal year has been the inflow of $633 million from the coalition support fund,” said Schehzad.
He contended that macroeconomic indicators such as inflation have not improved significantly while the government has failed to increase its revenue base. He said that two months will pass like a breeze unless the government shows an unprecedented level of seriousness.
Published in The Express Tribune, January 30th, 2011.