More sectors be enveloped under concessionary financing facility
Unanimously all depending on the working capital to seek financial supports for running business operations agree that high credit cost adds burdens to inflationary pressure that guides direction of monetary policy in many countries including Pakistan. If inflation increases then central bank pushes discount rate up thereby increasing lending rate to arrest it. It is generally believed that high credit costs guided by inter banks rate remained one of the factors pulling down industrial production at a substantial rate in Pakistan during last fiscal 2008-09.

On the contrary, the central bank is little cautious of inculpating increased discount rate entirely for the slackness in production contending banks' debts constitute only a small portion of an entire commercial venture. While industrialists do not hold positive remarks about high interest rate monetary policy makers presents reversed comment saying the increase of discount rate by 50 basis points, for instance, translated into only 0.5 percent rise of interest rate, has a little chance of leveraging cost of business operation. Riaz Riazuddin, Economic Adviser, State Bank of Pakistan dispelled the impression that high interest rate spoiled the smooth process of industrial production and brought about upsurge in the cost of production when asked about impact of soaring discount rate on industrial productivity. "Credit constitutes only four percent of the total capital required for production," he told this scribe during an interview. However, he did not maintain if rise in credit proportion could improve productivity.

Monetary policy
For last two years, State bank had had tough measures regarding interest rate and revised rates upward many a times to curb spiking inflation. Cumulative rise of 500 basis points during 2008 had squeezed enough liquidity from the market to bring stabilization in the economy, but macro economic fundamentals like current account and fiscal deficits of late started to depict signs of recovery. In fact, many openly rubbished monetary tightening as an exercise in futility to rein in supply-driven inflation, which had spurt in volatility in prices of commodities in international market. The positive outlook of inflation in the beginning of this calendar year made the central bank to come soft on policy rate finally. Economists are of the view that central will likely to put discount rate and Cash Reserve and Statutory Liquidity Requirements at rest in order to drive economic growth for the current fiscal year 2009-10. The growth projection is 2.5 to 3 percent for the year.

By the end of first quarter of this calendar year, inflation declined to 17 percent, according to the official figure. This would further drop in FY 2009-10, reportedly said Finance Adviser, Shaukat Tarin. Under the Standby Arrangement loan of IMF, Pakistan needed to control inflation through restricting money supply. Finance ministry discussion with IMF officials about policy downward revision has however proved that management of money supply through prodding discount rate has been the prime tool for the central bank. The last fiscal year witnessed a sluggish growth of credit flows to the private sector. While final statistics have not been released, yet provisional data of the year show significant decline in private credit flows owing to several internal and external factors.

Global economic recession
In order of priority, global economic recession unravelled serious trouble for the exporting countries. Emerged out mainly in developed countries, the economic downturn adversely hampered the growth of international trade. The contraction in consumer demands in USA and European Union compelled the exporting industry of Pakistan to scale down production. That has manifestation in reduction in exports during the last financial year. Exports of textile and clothing-major export driving sector-declined by 9.27 percent during July-April of the fiscal 2008-09 to $7.898 billion from $8.706 billion in the corresponding period of preceding fiscal year. Low production slashed the demand of private credit. On the other hand, quite related cause behind downward private credit flows was reluctance of commercial banks to disburse loans to the private sector. There were two main reasons. Firstly, non-performing loans, partly stirred by underperforming large-scale manufacturing and small and medium businesses, built up credit risks for the commercial banks, which in turn maintained liquidity position in the risk aversive government securities and decreased exposure in advances.

Loans outstanding position at the end of March 2009 stayed at Rs517 billion as against Rs532 billion in this month a year back while net NPLs to net loans was Rs391 billion as against Rs357 billion. Secondly, high yields on government securities attracted banks to invest in them. High discount rate made investment in treasury bills and other instruments profitable for banks. Thus, it may be said investment in government securities made banks liquidity that might be infected in private sector in use. All sectors that include corporate, SMEs, agriculture, consumer, agriculture, and commodity operations reduced borrowings from banks. Working capital finance-largest shareholder of advances and loans-contributed substantially in the decline.

During Jan-March 2009, while advances growth declined by 5.6 percent, yet investment in government papers increased by 20 percent (Rs216 billion) as against 6.8 percent in the corresponding period. The share of advances in total assets decreased to 52.6 percent as compared to 56.6 percent in December '08 and that of investment increased to 22.6 percent over 19.1 percent. The SBP quarterly review noted that this decline was a result of banks' realignment of their risk profile.

Despite banks veered from traditional markets, they earned a staggering profit before tax of Rs26.2 billion during the quarter in a wide contrast to Rs10.5 billion in the preceding quarter ended December '08. The major propeller of profits was an average spread between lending and deposit rate of 7.7 percent that had no parallel in the region. Still this difference is extraordinarily high and putting stymie in deposit mobilization for banks.

Industrial scientists suggest banks to share huge profits with their clients through reducing cost of credit and increasing rate of return on deposits. Working capital needs cannot fully be fulfilled by export financing scheme or long-term financing that has targeted base to cater. State bank should envelope more sectors under concessionary financing facilitation to enable government to achieve single digit inflation target this fiscal year and to increase revenue from exports. Easy and low cost financing would increase productivity of agriculture, SMEs, and LSM, therefore State bank should enforce extension in disbursement to them particularly agriculture sector, which has been under hardness for lack of finances since decades.