SBP looks to retain big share in profit

Amid a spike in its profits that surged to over Rs900 billion in the last fiscal year, the State Bank of Pakistan (SBP) tried to retain around one-third of the earnings to build its cash reserves and ensure financial autonomy from the centre.

But the move has not been fully endorsed by the Ministry of Finance that has managed to shoot down at least one proposal of allocating 20% of the profits during fiscal year 2019-20 for building-up general reserves, sources in the central bank and Ministry of Finance told The Express Tribune.

The central bank has still managed to retain Rs177.5 billion or over 16% of the profit before appropriation during the last fiscal year that ended in June, said the sources. The SBP board has also approved to deduct this sum from the total profits of the last fiscal year.

The amount has been held on account of paid-up capital, which has been increased by Rs67.7 billion, and 10% of the profit or Rs110 billion has been withheld for temporary increase in reserves, said the sources.

But the SBP wanted to take away Rs398 billion in total, which the Ministry of Finance did not endorse due to its implications for budget deficit, the sources in the Ministry of Finance said. The SBP had also proposed to its board that 20% of the profits should be retained for building up general reserves but the proposal did not sail through, said the sources.

When contacted, a senior official of the Ministry of Finance said that in recent weeks there were moves by the central bank that had implications for overall fiscal operations and the finance ministry accordingly responded to that by not accepting certain proposals.

Any deduction in profits by the SBP has direct bearing on the overall budget deficit, which for two consecutive years has remained above 8% of the GDP - a level that is not sustainable and is pushing Pakistan deeper into debt trap.

In one of the recent SBP board meetings, the central bank management had requested that an amount of Rs33.84 billion per quarter may be retained in the third and fourth quarters for enhancement of paid-up capital. The SBP board had endorsed the move and resultantly the bank’s paid up capital was increased by Rs67.7 billion.

The management had also requested that 20% of annual distributable profit of fiscal year 2019-20 may be retained by appropriation of Rs110 billion each during third and fourth quarters, provided this does not reduce the distributable profit to the government for fiscal year 2019-20 below Rs684 billion, the level incorporated by the International Monetary Fund (IMF) in its projections. But this proposal met with opposition from the Ministry of Finance.

In fiscal year 2018-19, the SBP had retained Rs61.7 billion in temporary reserves and Rs123.4 billion in building up general reserves, which gave a shock to the federal government and resulted into budget deficit of 8.9% of GDP.

The sources said that the central bank wanted to build the general cash buffers to create cushion for days when it may run losses. The other reason was ensuring financial autonomy from the Ministry of Finance.

The sources said that the IMF had also advised the central bank to increase its capital adequacy ratio due to low equity as percentage of monetary. As of end June 2019, the monetary liabilities of the SBP were Rs7 trillion and the capital adequacy ratio was 1.7% as compared to world average of 13%.

It is not for the first time that the central bank and the Ministry of Finance had difference of opinion on the fiscal and administrative autonomy. A draft bill, seeking absolute autonomy for the central bank, is also pending in Q Block.

The budget deficit in fiscal year 2019-20 surged to 8.1% of GDP despite the finance ministry still booked Rs935.5 billion SBP profits. The key reason for huge profits by the central bank is the increasing debt servicing payments by the Ministry of Finance to the SBP.

The SBP has extended around Rs7.5 trillion debt to the federal government at an interest rate of Karachi Interbank Offered Rate plus 0.7%. The money that the federal government pays to the SBP in interest is taken back in central bank profits.

But this accounting exercise has implications for the budget deficit and overall economic performance of the PTI government that is struggling to contain the ballooning public debt.

The federal government on Friday also decided that SBP would provide dividend at the rate of 10% on the face value of SBP shares in the bank’s annual accounts for the year ended June 30, 2020.

The shares of the bank are held by the government of Pakistan and certain government controlled entities except for 200 shares held by the Central Bank of India (held by Deputy Custodian Enemy Property) and 500 shares held by the State of Hyderabad, according to the SBP’s financial statement 2018-19.

SBP response

“The State Bank of Pakistan (SBP), among other things, earns income from interest on government borrowing from SBP, interest on foreign exchange reserves and interest on lending to banks, both for money market operations and development purposes. During the financial year ended on June 30, 2020, SBP transferred an amount of Rs935.5 billion on account of surplus profit to the federal government, which includes Rs6.5 billon from retained profit of preceding year ie 2018-19 whereas rest of the amount pertains to the profit generated during financial year 2019-20,” said the SBP chief spokesman.

“The primary component of SBP’s surplus profit for FY2019-20 was interest on government borrowing from SBP. The government’s re-profiling of its debt to SBP had nominal impact on overall profitability while improving the government’s debt profile by lengthening the average maturity of debt. Also, exchange gains have no bearing on the profit transferred to the government for the reason that under section 42 of SBP Act, 1956, unrealised exchange gains are not remittable to the Treasury.

“Likewise, the building up of government cash buffer has no relation with SBP profitability as government accounts with SBP are current accounts in their nature which the government is obligated to keep with the bank free of interest under section 21 of the SBP Act, 1956.”

Published in The Express Tribune, August 23^rd, 2020.

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