Private profit, public indebtedness

Data released by the State Bank earlier this week on commercial bank lending during July to February 19, FY21, earned the headlines suggesting significant revival of the private sector. There is, after all, a jump of 80.5% over the comparable period of FY20. The fact is remarkable because of what it hides. First, the private sector borrowing of Rs195 billion was at its historic low in FY20. Any increase would show a high percentage, the so-called base effect. Second, the total increase of Rs352 billion so far in the current year is nothing to write home about. Even before the pandemic in FY19, it was just Rs693.5 billion. Out of this, private sector businesses secured loans amounting to Rs574.6, 85.6% for working capital and the remaining for the fixed investment. This is as high as it could get. In fact, the private sector borrows in billions against the government borrowing in trillions, although the former constitutes over 90% of the economy. Private commercial banks enjoy the ease of doing business with a government that finds it easy to borrow rather than tax. The closure of the State Bank window for government borrowing under the current IMF programme has left the government no choice but to crowd out the private sector further. Profits of the private banks soar, while public indebtedness rises.

Since the late 1980s, market-determined financial intermediation by banks has been promoted as an efficient means to accelerate investment and growth. Donor-driven financial sector reform and the programmes of deregulation, liberalisation and privatisation were put in place to achieve this objective. Curiously, the share of private sector credit in GDP was 25% in the 1980s, when the banks were still nationalised. Now, after all that jazz of reform, it is 17%. There is also a significant decline in our relative ranking of credit penetration among the emerging market and developing economies. Growth has collapsed and the state finances are a nightmare. Deindustrialisation and agricultural stagnation have dimmed the prospects of reaping the demographic dividend. The large size of the informal economy is blamed for poor access to credit. It was no smaller at the peak of credit penetration in the 1980s. Financial inclusion programmes are necessary, but the state’s hunger for credit and high interest rates cause the exclusion of a large segment of even the formal economy. Financial sector reform was good for the banks, but not for the economy. A somewhat better fiscal situation in 2000s forced banks to enter the consumer finance, but not without a supportive monetary policy. With the drying of assistance related to the War on Terror, the fiscal crisis of the state returned and the bank credit pre-emption resumed.

In countries where the presence of state-owned banks remained significant, the availability of long-term credit for capital accumulation and for small and medium enterprises catalysed high growth. Similarly, directed credit continues to sustain agricultural growth in a number of countries. Housing, especially for the less endowed, is another important area of the continued directed credit. The Great Recession made even developed economies to think afresh about the role of the state in the economy. In our context, a selective return of the state has to be accompanied by improved quality of governance and devolution of power and authority to the local level. More importantly, the autonomy of the State Bank is important, but not at the expense of making credit accessible to small men and women in business and agriculture including livestock, affordable housing, skill formation for future and innovators.

Published in The Express Tribune, March 5^th, 2021.

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