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Karachi Transformation Plan 2020

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Karachi Transformation Plan 2020

In 2014, government of Sindh requested the World Bank Group for its assistance in providing strategic
advice regarding improving the livability and competitiveness of Karachi. This non-lending technical
assistance was funded by the Korean Green Growth Trust. The World Bank Group committed to
present a City Diagnostic and Transformation Strategy, which they hoped will enable the Government
of Sindh to prepare an implementation of Karachi Strategic Development Plan 2020, prepared by the
City District Government Karachi, in 2007. The World Bank Group presented its report in 2018.
In August 2018, a new federal government was sworn in. On November 28 , 2018, President Dr. Arif
Alvi presided over the introductory meeting of Karachi Transformation Committee (KTC), held at Governor’s
House, Karachi. On 30 march 2019, while chairing a meeting of the committee at Karachi, Prime
Minister Imran Khan announced Rs. 162 billion development package for Karachi.
In August 2020, Karachi received its heaviest rainfall in a single day in 53 years. The rain claimed
more than 30 lives; electricity supply and cellular services in the city were disrupted for days. Against
this backdrop, on 31 August 2020, the PM directed the government to finalize the Karachi Transformation
Plan within the week.

Click Below to download the report:

Karachi-Transformation-Prime-Institute.pdf

Liberalize and Integrate: EAG outlines its vision of a new auto policy

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Liberalize and integrate:
EAG outlines its vision of a new auto policy

Transformation of the Auto Industry needed from protection and indigenization to liberalization and integration

The independent Economic Advisory Group (EAG) convened detailed deliberations to assay the outcome of contemporary automotive development policy, and the initiatives proposed in the Finance Bill 2021-22. It observed that prevalent policies do not present a path for transformation for the sector to either meet the needs of the domestic consumer or become globally competitive. Specifically, these fall short at both providing a mechanism to bring down prices on sustainable basis and ensuring development of Pakistan’s industrial capabilities necessary for competing in international markets.

EAG observes that the incentive structure in place is not designed to leverage the country’s latent comparative advantage. This is precisely the reason why, despite decades of protection, the industry has failed to become competitive internationally. Instead, a more efficacious policy would focus on exploiting Pakistan’s inherent latent comparative advantage, which would incentivise greater concentration of resources in segments of auto-industry supply chain where Pakistan has necessary capabilities to compete globally. For example, although by no means guaranteed, an auto-policy which moves away from specializing in the end-product (e.g. assembly) and, instead, focuses on subsectors where comparative advantage is more probable is better suited for achieving policymakers’ objectives – consumer welfare and increase in industrial capabilities.

The auto industry has received protection from government for more than three decades without robust analysis of requisite pre-conditions, which has been standard practice in most trading blocs (e.g. EU) for several decades. For instance, researchers use empirical efficiency tests like the Mill test and Bastable test, and analyse of the welfare implications of the incentive structure to objectively measure the impact of protectionist measures in place. On both these measures, the auto industry and, implicitly, auto-policies fail. This relaxed approach to providing incentives at the expense of consumer explains why the industry continues to struggle at achieving the economies of scale necessary for competing globally.

The efficacy of any policy is contingent upon prudent allocation of resources. EAG argues that the prevailing policies have allocated country’s resources in production activities where Pakistan has an inherent disadvantage. The 1.8 million people currently employed throughout the supply chain could be reemployed across activities where Pakistan enjoys a latent comparative advantage. The misuse of resources remains the least appreciated point and EAG wishes to bring it to policymakers’ attention.

The evolution of trade has prompted countries to realize comparative advantage, cars made in Germany compete with cars made in Japan, and specialize in the stages of supply chain, it is impossible to say where a car is manufactured. Data shows we are likely to have a comparative advantage in auto-parts and two/three wheel automobiles, and for which, there are significant primary/secondary markets in Africa and Asia.

The EAG proposes that the upcoming auto policy should promote integration of domestic parts manufacturers with global value chains through two actions. First, liberalization of trade regime to give market access to international automobile manufacturers in exchange for integrating domestic parts manufacturers in their value chains. Second, identify and engage with key auto markets across the world with the aim to reduce frictions to cross border trade and provide certainty to international auto players vis-a-vis operating their supply chains from Pakistan.

Policy should focus on securing access to African and Asian markets to expand exports to primary/secondary markets, which can be accomplished through actively seeking FTAs with African Union, RCEP, and Central Asian countries.

Investment in the enhancement of domestic capabilities for the expansion of potential areas of comparative advantage should be the central stage of transformation. First, businesses need to be incentivized to invest in research and development and produce new products. Second, coordination between relevant business associations, domestic manufacturers, and global players is needed for the standardization of both products and production processes.

Furthermore, it is imperative to identify emerging skills’ requirements and liaise with engineering universities and NAVTTC to ensure appropriate intervention at the earlier stage.

EAG has also made available a presentation on auto-sector reforms on PRIME’s website with the aim to present an alternate set of policies than what is being currently proposed.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

Click below to read the complete presentation:

Auto-Industry-Presentation.pdf

For media inquiries, please contact Afzal Khan at [email protected] or 0333-0588885.

Economic Freedom Promotes Upward Income Mobility

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Economic Freedom Promotes Upward Income Mobility

New study shows increased economic freedom leads to greater income mobility for workers and entrepreneurs

Islamabad, Pakistan—Economic freedom enhances income mobility while the poor in unfree nations have fewer opportunities to escape poverty and build prosperity, finds a new study released today by Policy Research Institute of Market Economy (PRIME) in conjunction with Canada’s Fraser Institute, an independent, non-partisan public policy think-tank.

“The main purpose of economic development should be to provide opportunities for upward social mobility of a vast majority of citizens. This can be achieved through inclusive economic policies and re-allocation of resources from rent seeking to efficiency seeking activities” said Ali Salman, Executive Director PRIME.

Many factors contribute to economic freedom but the most important for income mobility are rule of law and restrictive regulations. In uneconomically free nations, domineering government and crony elites use the rule of law, not to protect the freedom of all but entrench the privilege of their cliques while undermining the rights of everyone else.

Similarly, regulations are too often used to exclude people from work and opportunity, even in nations with a relatively robust rule of law. Government regulation may require workers to purchase occupational licenses or train to acquire credentials before they can work.

Pakistan ranked 139 in rule of law, ranked 140 in economic freedom and 123 in regulations; the country stood at 137 in terms of labor market regulations and 109 in business regulations.

“Government regulations impede the ability of workers to make themselves better off by slowing the upward mobility of workers,” said Vincent Geloso, an assistant professor of economics at George Mason University, senior fellow at the Fraser Institute and co-author of Economic Freedom Promotes Upward Income Mobility

The study shows that labor regulations across industries slow wage growth for low-income workers. And, particularly, inappropriate minimum wages and occupational licencing tends to hurt income growth among the poor more than among higher-income workers.

The same effect is also observed for would-be entrepreneurs who face barriers to entering certain industries because of regulatory costs and fees.

“If governments are genuine in their desire to help low-income workers climb the income ladder during the COVID recovery and beyond, they should take a second look at regulations and look for ways to increase economic freedom in their respective jurisdictions,” Geloso said.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories, including PRIME Institute in Pakistan. It’s the world’s premier measurement of economic freedom.

Click below to read full report:

Economic-Freedom-Promotes-Upward-Income-Mobility.pdf

MEDIA CONTACT:
Afzal Khan:
[email protected] or call at 03330588885

CCP ruling on sugar industry: the second opinion

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CCP ruling on sugar industry: the second opinion

Ali Salman

ECC’s role in granting permissions for import, export of sugar should be discontinued

ISLAMABAD: Adam Smith noted centuries ago, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He was probably right here and may have rightly predicted the tendency of business associations towards collusive practices.

This is the main message of the ruling of the Competition Commission of Pakistan (CCP) in the case of Pakistan Sugar Mills Association (PSMA) and its members, finding them guilty of collusive practices and imposing the biggest-ever fine of Rs44 billion.

The CCP has found that the PSMA has deliberately facilitated the formation of a cartel on behalf of its members, which has resulted in welfare loss.

The CCP has also found that real-time stock tallying by the firms was carried out to manipulate the availability of sugar in the market, influence export decision and thus influence pricing.

The CCP has classified the stock sharing as “commercially sensitive information” and has almost entirely relied on this assertion for reaching the conclusion.

A rare event in this case is that the commission, comprising four members, was split into half and the chairperson cast her second vote to endorse the decision. While this legal point will be challenged, we need to understand the economics of it.

The authors of the “second opinion” have differed with the judgement on Issue I (sharing of sensitive commercial stock information), Issue II (collective decision to export), Issue III (effect of collective decision of export on price), Issue IV (zonal divisions in Punjab to coordinate sales) and Issue V (collective bargaining practice in USC tenders).

It will be instructive to read the “second opinion” – as published on pages 135-173 of the 186-page decision that the CCP has issued. These pages contain a deep analysis of the sugar market dynamics in Pakistan as well as some legal arguments leading to dissent.

The dissenting members of the commission found that the allegation of market manipulation against PSMA needed further analysis.

Concurring with this, the sugar industry being a heavily regulated sector is a peculiar case where rent-seeking on the one hand by the firms and excessive intervention by the government on the other hand have resulted in the “worst of both worlds”.

Consumers get expensive sugar whereas farmers and industrial units remain inefficient. The net winner may be the government which reaps more revenue in the form of taxes than the profit earned by the firms.

Here is my theory. The CCP is unanimous that no single firm is in a dominant position to influence the market, however, collectively they do.

What is the one factor which brings these competing firms to become one voice? It is the collective formed by the Sugar Advisory Board, cane commissioners and the Economic Coordination Committee (ECC).

By actively deciding the input price, time of harvest, time of crushing and controlling import and export, these collectivist institutions create a uniform condition for market players, kill competition and encourage them to form a cartel.

In the instant case, by constantly asking the PSMA and sugar mills to provide their stock data, the government has effectively made price levels insensitive to the stock position. As noted in the second opinion, the supply and demand forces are no more at work.

Which laws can be used to indict the government for encouraging the collusive behaviour?

Unfortunately, the Competition Act 2010 bars the CCP from indicting the government itself if it is found guilty. That is why we see that the CCP seems to be overly concerned with price control, which is not its mandate.

It has recommended the government to make efforts to collect information about stocks independently. Instead, it should have recommended the government to exit this sector.

The moment the government exits, the sugar firms will lose the platform where they can directly negotiate commercial decisions with the government. They will continue, perhaps, their own “merriment and diversion”. Let them be.

The government should allow free market forces to play their role. If domestic players collectively decide to raise the price, a competitive trader, while pursuing self-interest, will import sugar, thus keeping prices in check.

If prices go up in the international market, local producers will be free to sell in the external market. The increased price of sugar will finally dictate the consumer behaviour. But we have killed this cycle of free competition in the name of welfare.

This goes beyond the CCP but the role of ECC in granting permissions for import or export of sugar should be discontinued.

All archaic laws (the Sugarcane Act 1934, Sugar Product Control Order 1948, Sugar Factories Control Act 1950 and Control on Industries Establishment & Enlargement Ordinance 1963) along with concomitant institutions need to be phased out and abolished.

The CCP decision may be received positively by the public and the government, as it confirms the “mafia” image of sugar industry.

But it falls short of understanding a centrally controlled market, where supply and demand are irrelevant. Without understanding the market, the law itself cannot prevail.

The writer is the founder and executive director of PRIME, an independent think tank based in Islamabad

Published in The Express Tribune, August 30th, 2021.

Moving to new industrial policy

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Moving to new industrial policy

Ali Salman

Policy should be based on open trade, export orientation, value addition and innovation

ISLAMABAD: The debate on premature de-industrialisation in developing economies hinges on the premise that open trade, elimination of protective tariffs and withdrawal of subsidies are harmful for local industries.

In the case of auto policy, the proponents of this debate devised import substitution policies, which led to the deletion programme. Thus, while it helped local auto parts industry to develop, it gave rise to a protected auto industry, which has continued to flourish on the back of tariffs and other incentives. The government and automobile industries are the main beneficiaries as this has led to a stable flow of income for both at the cost of consumers, who have been forced to pay more for less.

Furthermore, the rising demand for cars on the back of income and improved infrastructure has created opportunities for the market to arbitrage the lag in production, resulting in the unique phenomenon of “on money”. This policy has not only caused harm to the consumers, but it has also proven to be a bad industrial policy. Pakistan has not been able to produce a single car which is competitive regionally or internationally.

As Pakistan has not achieved economies of scale, there is hardly any incentive in innovation and product development. The benchmark of economies of scale for the auto sector is 500,000 units (cars, vans and jeeps) in a year, whereas the government target was to achieve production of 350,000 units. The country’s production has barely crossed 100,000 units. Thus, the high tariffs have led to expensive assembled vehicles, suppressing demand and hence production.

This has resulted in an oligopolistic structure where some players have benefitted hand in hand with the government, which has benefitted from the high level of excise duties, which in turn has made cars more expensive. This is the double jeopardy that the country’s old industrial policy has visited upon us. As the government is revisiting the industrial policy, and in particular the automobile policy, there is an opportunity to evolve a new industrial policy.

“The past and contemporary policies have been focused on merely establishing assembly units, instead of developing manufacturing capacity, which is the real driver of growth in an economy; consequently, the inflow of FDI has been limited compared to profits earned and repatriated out of the country,” observed recently the independent Economic Advisory Group.

The timing is critical. Pakistan is stuck at a low level of exports and there is no way to jump on this ladder while relying on the existing product mix, which has been maintained for the last 20 odd years. Pakistan’s commodity basket including textile, rice, leather, etc is highly unlikely to help achieve the ambitious export targets. While the country may see a gradual rise in total exports, thanks to IT services, the manufactured exports will not be contributing to this rise. Thus, we may be seeing de-industrialisation even more rapidly.

Government measures are only contributing to the de-industrialisation. In the context of the upcoming auto policy, the decrease in tariffs on completely knocked down (CKD) kits, as envisaged in the Finance Bill 2021, which will be imported into the country and then assembled, in reality, discourages the domestic auto parts makers because imported items are being subsidised against domestic production. This implies that relative profits will be higher in the assembly business as compared to the auto parts manufacturing business, which will gradually reduce the linkage between the auto assemblers and the domestic auto parts makers.

In the context of expected foreign direct investment (FDI) in the telecom sector, if mobile phones are assembled without value addition arising from some intrinsic latent advantage but only as a result of some fiscal incentive, then the industry will remain dependent on protection from the government and manufacturing will not become a profitable avenue for companies. Such investment will be market-seeking instead of efficiency-seeking.

The new mobile phone manufacturing policy is also regressive as tariffs are more than 70% on lower-end mobiles and hover around 40% on higher-end phones. The policy also fails to incentivise the inflow of new technology and latest devices to the country as consumers will be paying higher prices for old-generation phones just to enable companies to set up assembly units in the country.

What needs to be done?

As envisioned in the Vision for Economic Transformation, Pakistan needs to alter the existing incentive structure dramatically.

As a corollary, we propose a new industrial policy. The main parameters of the new industrial policy should be open trade, universal reduction of tariffs instead of selective reduction, integration with the global value chains, export orientation, value addition, product development and innovation. The government should play an active role through the new industrial policy.

It should use its democratic power to counter the influence of powerful lobbies and ill-informed bureaucrats. An incremental approach will not work and will only provide more time for protective lobbies as well as arbitragedriven investors to maximise profits at the cost of the country’s manufacturing capability and consumer choice, which is the ultimate arbiter of market.

THE WRITER IS THE FOUNDER AND EXECUTIVE DIRECTOR OF PRIME, AN INDEPENDENT ECONOMIC POLICY THINK TANK IN ISLAMABAD

Published in The Express Tribune, August 09th, 2021.

Financing private sector growth

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Financing private sector growth

Ali Salman / Beenish Javed

Increasing private sector credit is imperative to improve business confidence

ISLAMABAD: Over the last two decades, Pakistani banks have experienced structural reforms and a phenomenal growth.

Their profitability has multiplied several times and they have played an important role in job creation as well. But it remains debatable whether the privatisation of banks has contributed meaningfully to financing the private-sector growth.

In this backdrop and in light of a new study by PRIME, this article assesses the trend of banking credit for the government and private sector in the post-reform period.

In the 1990s, banking reforms were introduced to reduce government’s footprint in the industry, increase private sector credit, minimise the ratio of non-performing loans, and improve banks’ efficiency and profitability.

Despite improvements in technical efficiency and profitability, the banking sector post-privatisation has not delivered necessary dividends for the private sector, as also noted by former chief economist Pervez Tahir.

It has been inefficient in performing its core function of channeling depositors’ savings into loans for private businesses. Instead, these funds are being increasingly geared towards government debt instruments to earn easy and secure profits.

Consequently, a large proportion of private businesses, particularly the small and medium enterprises (SMEs), remains financially excluded and faces difficulty in accessing finance.

Pakistan continues to lag behind regional economies with respect to penetration of bank credit and private investment.

According to the study, the ratio of private sector credit-to-gross domestic product (GDP) declined from 27.7% in 1985 to 18% in 2019, indicating a low bank credit penetration into the economy post-reform. This ratio remains significantly higher in Bangladesh (45%) and India (50%).

Furthermore, private sector’s participation in fixed investment remains lacklustre at 11% while the same stands at 23% in Bangladesh and 21% in India.

Several demand- and supply-side factors have contributed to the post-reform decline in private sector credit.

Starting with the supply-side factors, the first and foremost has been the rising government footprint in credit market in the form of increased borrowing from commercial banks, supported by the rise in interest rates.

In 2011, the suspension of Standby Agreement with the International Monetary Fund (IMF) forced the government to increasingly rely on local banks to meet its budgetary requirements, resulting in crowding out of the private sector.

Between 2015 and 2018, the focus of government borrowing shifted from scheduled banks to the State Bank of Pakistan (SBP), resulting in a decelerated pace of scheduled banks’ investment in government securities.

Over the last two years, banks’ investment in government securities has surged again on account of IMF condition restricting government borrowing from the SBP.

The large federal footprint in the credit market has thus suppressed private credit offtake by reducing the funds available for private credit. Moreover, the lucrative mark-up on government securities has provided an impetus to the banks to increasingly invest in them.

As of December 2020, credit to the government stood at Rs15.2 trillion as against private sector credit of Rs6.5 trillion.

Second, the decline in private sector credit can partially be attributed to the shrinking footprint of development finance institutions (DFIs).

Post-reform, these institutions gradually faded due to the broad restructuring of the financial sector, leaving a void in terms of institutions that could provide long-term financing for the development of key industries.

Third, loans and advances given to the private sector generally entail the risk of default. This risk, however, is more pronounced in case of Pakistan due to non-existence of bankruptcy laws and imperfect information.

Given that there is an alternative of risk-free investment available and credit demand from the government continues to increase on the back of rising budgetary requirements, the post-reform banking sector has little incentive to extend credit to the risky private sector, especially the SMEs that are often subject to credit rationing.

Fourth, the red tape or cumbersome procedures to access finance through formal channels have repercussions for the private sector credit.

Post-reform banks have devised procedures and systems keeping in mind the blue-chip corporations. The higher collateral requirements and legal costs in case of default increase the compliance cost and put SMEs at a significant disadvantage.

Fifth, the restructuring of financial sector has been detrimental from the inclusion standpoint as banks’ disbursements are heavily skewed towards blue-chip corporations, while SMEs remain financially deprived.

The share of large-sized borrowers in total loans of the banking sector stands at 87% in Pakistan relative to 72.5% in Bangladesh while such borrowers account for only 1.6% of the total borrowers in Pakistan.

There are demand-side constraints to private sector credit as well including poor financial awareness and attitude towards formal finance as well as sluggish demand for long-term investment.

Moreover, the high mark-up on long-term loans has undermined the financial incentives and failed to stimulate demand for long-term investment. Therefore, most borrowing by the private sector centres around working capital, which is cheaper to avail.

During these unprecedented times, increasing private sector credit and ensuring financial inclusion is imperative to improve the business confidence and propel private sector activity.

This needs all parties – banks, private sector and the government – to alter their course and take a different direction. The government must roll back and the banks must make an advance.

The writers are affiliated with the PRIME Institute, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, July 19th, 2021.

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

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A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

Vision for Economic Transformation

This is a Draft Note for Discussion authored by PRIME’s Research Economist Mr. Tuaha Adil. The policy note comprises valuable inputs from the members of the Economic Advisory Group.

The transformation of an economy is contingent upon the utilization of resources in the most productive manner. Sectors of the economy will operate at maximum potential when business conducive ambiance is created through favorable and ease promoting government policies. The economic transformation policy based on the identification and resolution of contemporary structural and sectoral inefficiencies and futile economic policies is inevitable for the prosperity of the country. The performance of the auto sector is analyzed as a case study to evaluate the efficiency of government industrial policies. The government’s policies and initiatives to expand the auto industry are based on the assumption of latent comparative advantage. Therefore, domestic auto companies are protected from international competition through tariffs and tax cuts. However, the outcome of policies and performance of the sector have been unsatisfactory due to confinement to assembly of vehicles and nonexistent localization of products. The policies adopted by countries having developed automobile industries have also been discussed to evaluate shortcomings of the policies adopted in Pakistan.

Click below to read the full report;

Auto-Policy-Note-10.8.21.pdf

PRIME Budget Review FY 2022

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PRIME Institute, Islamabad based independent think tank has released its commentary on the federal budget 2021-22. According to the report authored by PRIME research economist Beenish Javed, the budget is both pro-growth and inflation prone. The key messages of the report are:

• The federal budget strategy for FY22 is pro-growth and spending-led.

• Customs and Federal Excise Duties have been reduced to facilitate the industry and
exports.

• The new budget entails reduction in existing indirect taxes with no new direct tax on salaried class and businesses.

• Gains from higher growth rate can be wasted in the case of increased food inflation.

• If international oil price does not come down, a possible hike in petroleum levy is likely to result in cost-push domestic inflation.

• The budget FY22 entails increase in power subsidies but not food subsidies.

• Fiscal prudence in the case of Public Sector Enterprises (PSEs) and commitment to privatization is appreciable.

PRIME since 2013, has been advocating for reduction of tax rate, lowering import tariffs and reducing wasteful expenditures. The lowering of customs duties and tariffs on a wide range of raw material imports as well as announcing of zero duty regime on IT products is certainly a great news.

Commenting on the budget, PRIME Executive Director Ali Salman said that “the government has presented a pro-growth budget by tax cuts and demonstrating fiscal prudence, though some of the additional indirect taxes on key commodities will backfire.” He also said that the budget sanctity has to be ensured and hoped that no mini-budgets are introduced in the next fiscal year. Ali said that on the whole this budget will be appreciated in the board rooms but may not be welcomed in the kitchens.

PRIME report mentions that Federal government’s commitment to improved recoveries from state-owned enterprises as well as higher targets from privatization proceeds is appreciable. This is high time that the government delivers on its promises of turning around loss-making public sector enterprises.

The report says that contrary to the claims of being a pro-poor budget, ambiguity remains as to how this budget will reduce food inflation in the upcoming fiscal year. Under the federal budget FY22, government has proposed to increase the turnover tax on wheat from 0.25 percent to 1.25 percent, while the sales tax on flour bran is set to enhance from 7 percent to 17 percent. Moreover, Rs. 7 billion would also be collected from sales tax on sugar. Since both are essential commodities, increase in their prices is likely to worsen food inflation. Direct and indirect cash transfers to low-income group is a short-term solution for mitigating the effects of food inflation and other socio-economic issues, which this budget entails. However, a long-term and a more sustainable approach calls for increasing real incomes, employment opportunities, human capital development and sustaining economic growth in order to achieve a definite improvement in socio-economic indicators.

Please click on the pdf below to read the full report.

Lending from Privatized Banks: More for government, less for private sector

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Lending from Privatized Banks: More for government, less for private sector

A new report released by PRIME finds that the commercial lending to the private sector has declined from 24.1 percent of GDP in 1995 to 17.9 percent in 2019 undermining private sector economic growth, while increasing bank’s profitability manifolds.
The report finds dramatic increase of share of government securities in banks’ investment portfolio from 10 percent in 2010 to 46.4 percent in 2020, which indicates that banks have turned to risk-free lending to the government rather than playing a role in allocation of capital to the private sector. On the other hand, the profitability of banking sector increased from Rs 7 billion in 2000 to Rs 244 billion in 2020. These are the main messages from a recently released report by PRIME, an independent think tank, authored by economist Beenish Javed.
The report finds that the private sector lending stands at 17.9 percent of GDP in Pakistan, while regional economies like Bangladesh stood at 45 percent and India at 50 percent.
The report mentions gradual extinction of Development Finance Institutions as a factor, which were used to complement the banking sector by bridging the gaps in the supply and demand of financial services.
The report notes that after privatization, the infection ratio that stood at 25 percent in December 2000 fell to 8 percent in 2017and then increased to 9.2 percent as of December 2020.
The report also finds that in Pakistan, the banks’ credit disbursements to private sector are heavily skewed towards large enterprises. The share of large sized borrowers in total loans of the banking sector stands at 87 percent in Pakistan, such borrowers account for only 1.6 percent of the total borrowers, in contrast to 72.5 percent in Bangladesh.
PRIME Executive Director Ali Salman, commenting on the report, said that “the government needs to minimize its reliance on commercial borrowing as it not only displaces the private sector firms but also reduces risk appetite in banks”. Ali also urged that the commercial banks should streamline their financial procedures to reach out traditionally unbankable but profitable enterprises thus helping the policy goal of financial inclusion.

Please click on the pdf below to read the full report.

Debt without Growth

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Policy Research Institute of Market Economy (PRIME) released a report titled ‘Debt without Growth’ that assesses government’s two-year performance in the domain of Public Debt.

As per the report, Pakistan’s foreign debt and liabilities increased by $17.6 bn or 18.5 percent between FY19 and FY20. This increase has been coupled with a deterioration in both the debt bearing and debt servicing capacity. During FY20 government borrowed an additional $3.7 bn worth of grants and loans to support country’s corona relief efforts thus adding to the debt burden. Like its predecessors, the government has not been able to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment. Consequently, debt servicing remains the largest expense in the federal budget. The government has paid $11.9 bn in external debt servicing during FY20 which is 23 percent higher than the amount paid in FY19.

Please click on the pdf below to read the full report.

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Policy Research Institute of Market Economy

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