Loans to small borrowers: Improve access to credit, IMF urges Pakistan

Visiting official prescribes lowering of banking spreads, discouraging preferential access to loans.

ISLAMABAD:

In a bid to improve access to credit, particularly to the small and medium enterprises, the International Monetary Fund (IMF) urged Pakistan on Saturday to lower banking spreads – the difference between the rates at which banks lend money and take deposits from clients – and discourage preferential access to loans to hand-picked sectors.

People do not borrow from banks due to high interest rates, the IMF’s Director for Middle East and Central Asia, Adnan Mazari, said at a press conference jointly addressed by himself and Finance Minister Dr Abdul Hafeez Shaikh after a seminar.

Mazari asked the government to lower banking spreads to encourage both, borrowings and savings.

The average spread, at present, is around 7%. Analysts said that decline in spreads would only be possible if the government stops massively borrowing from banks, pushing them to explore new areas for lending money.

Participants at the closed-door seminar quoted Mazari as saying that there was a need to “focus on the banking sector [and] to improve access to credit by discouraging preferential treatment”.

Lowering of banking spreads to make credit available to larger sector of the economy is part of the government’s agenda, the finance minister said at the press conference.

Downside to preferential treatment

At a session on financial sector, it was revealed that loans made to the agriculture sector and small and medium industries have massively declined during the last few years, primarily due to preferential access to credit.

Most of the available credit is borrowed by the government either to finance its own expenses or intervene in the commodity markets.

Analysts say the IMF has been repeatedly asking the government to discontinue export refinancing facility and bring an end to commodity operations. According to estimates, 70% of all export refinancing credit goes to the 100 biggest exporters of the country, while 56% of total credit is obtained by top 50 exporters.

Situation ‘not rosy’

Pakistan’s economic situation is ‘not rosy’ and curtailing the budget deficit will be a challenge for the government, Mazari said.

The major impediment to growth is the energy sector, he said, adding that price increase alone will not solve the problem and that serious efforts are required to bring about structural changes in the sector.

“There is a need to improve the economic management”, he said, adding if the government wants people to pay taxes, the people in return seek transparent use of their money.

Mazari said the country needs safe regulations for investment, resource mobilisation and resolution of energy problem.  During Dubai talks, both Pakistan and the IMF discussed challenges posed by fiscal decentralisation following the 18th Amendment and the 7th National Finance Commission award, Mazari added.

Advice, admonition

There was ample advice and admonitions for the country’s economic managers. Speakers at the seminar urged the government to empower the politically-anemic economic team, one of the participants told The Express Tribune.

Former finance minister Dr Hafiz Pasha urged the government to focus on cutting expenses, instead of increasing revenues, while former World Bank official and economist Dr Abid Hassan said the government’s inability to increase revenues and reduce expenses indicates that it will default soon.

Published in The Express Tribune, November 20^th, 2011.