Banking Industries Updates

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Dual exchange rate resurfaces in banking market​

Insiders claim banks selling dollars at a premium, impacting small importers; discrepancy comes despite no restrictions on imports, LCs.

 

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SBP Vision 2028​

EDITORIAL: It’s easy to lose one’s way in the complex and sometimes deliberately vague language of financial markets. Therefore, the SBP (State Bank of Pakistan) will have to do a better job of explaining its recently released “strategic plan (2023-28)” to the Pakistani public, even the business sector that is usually familiar with industry jargon.

The plan, which spells out the Bank’s mission and vision statements and “key goals” to be pursued over the next five years, “represents SBP’s commitment to foster price and financial stability and to contribute to sustainable economic development of the country”.

This much is easily understandable. But since it most likely means that it will toggle interest rates and money supply to control prices and stimulate economic activity, which is the basic day job of all central banks, it is more a reiteration of its existing duties than part of a new strategic plan. Perhaps this line was added to the document in light of its poor track record over the last few fiscals, when it failed to arrest inflation or promote growth.

Regardless, the new vision revolves around six strategic goals that include “maintaining inflation within the medium-term target range, enhancing efficiency, effectiveness, fairness and stability of the financial system, promoting inclusive and sustainable access to financial services, transforming to a shariah-compliant banking system, building an innovative and inclusive digital financial services system, and transforming SBP into a high-tech, people-centric organisation”.

Interpreting these is a little tricky.

An inflation target range makes sense, even if interest rates remain a controversial way of dealing with the kind of cost-push inflation that economies like Pakistan’s suffer from. Even now, with the benchmark rate at the highest-ever recorded level of 22 percent, October’s CPI (consumer price index) reading clocked in at 26.9pc – that too after a significant drop in food inflation – which means inflation is still out of control and real rates remain in negative territory. And how efficiency and effectiveness of the financial system will be enhanced, even what it really means, is open to interpretation, or whether or not it overlaps with inclusive and sustainable access to financial services.

Also, just mentioning the expected transformation into a shariah-compliant banking system does not add any value to the debate already raging in financial circles, nor does it provide many answers to questions stakeholders are asking.

For, everybody wants to know how this will be done, and how the country is supposed to interact with the outside financial world when we are going to completely transform into Islamic banking while others, especially lenders that issue debt with interest, will stick to traditional banking models. This particular mystery remains unsolved.

It’s also been reported that these goals are built to cover five cross-cutting themes, including strategic communication, climate change, technological innovation, diversity and innovation, and productivity and competitiveness. While these are mostly generic terms, the bit about climate change is very interesting.

Governments have indeed incorporated climate-related issues into their financial policies. This started with Scandinavian countries, but with their sovereign wealth funds instead of central banks, and that too to prohibit investments in countries that did not comply with Scandinavian climate regulations. How SBP will embed climate change into its working needs to be explained.

There’s also the fact that much, if not all, of the five years covered by the vision will see the economy on life support, mainly through IMF (International Monetary Fund) bailout programmes. And, as we saw with the SBA (Stand-By Arrangement), when SBP had to increase rates in the middle of the night just to conform to the lender’s strict, contractionary monetary policy prescription, the Fund advocates central bank independence then also twists its arms for the manner in which funds are to be loaned to the government.

Therefore, how much freedom SBP is going to enjoy, especially when it comes to implementing its new, vague vision and mission remains to be seen.

 

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According to the PBS data, imports recorded a growth of 15.30pc to $4.25bn in July from $3.69bn in the same month last year. However, on month-on-month, the imports declined 14.27pc.

In FY24, imports fell by 0.84pc to $54.73bn compared to $55.19bn in FY23.

The trade deficit in July widened by 19.71pc to $1.95bn from $1.63bn over the last year.

In FY24, the trade gap narrowed to $24.08bn in FY24 from $27.47bn over the preceding year.

 

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RDA inflows hit $8.255bn mark​

Business Recorder
Aug 3, 2024

Gross inflows of Pakistan Roshan Digital Accounts (RDA) reached $8.25 billion at the end of June 2024, the State Bank of Pakistan (SBP) reported on Friday.

During the last fiscal year (FY24), on account of RDA Pakistan received gross inflows amounted to $ 1.9 billion from $6.350 billion in June 2023 to reach $ 8.255 billion in June 2024.

According to State Bank, out of total received funds, $1.61 billion has been repatriated while $5.212 billion have been utilized locally. Out of total $ 6.822 repatriated and locally utilised, the net repatriable liability remained at $1.434 billion.

Since the launch of the RDA account; i.e., from Sep 2020 to Jun 2024, total net investments made through RDA was $ 978 million. This included $348 million investment in conventional Naya Pakistan Certificates (NPCs), $592 million Islamic NPCs and $27 million in the equity market.

Other liabilities under the RDA stood at $31 million with $422 million being balanced in accounts.

 

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STATE BANK OF PAKISTAN

KARACHI - The State Bank of Pakistan will soon commission new currency for use in Pakistan, pending approval from the Federal Cabinet.

In this regard, new currency notes of denomination PKR 10 to PKR 5,000 will be issued NET December 2024.

 

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SBP cuts key policy rate by 250bps to 15pc​

Dawn.com
November 4, 2024

This photo shows the State Bank of Pakistan Museum building, in Karachi, on Oct 30, 2024. — Dawn.com

The State Bank of Pakistan (SBP) announced on Monday that it had decided to cut its key policy rate by 250 basis points (bps) to 15 per cent from 17.5pc amid demands for a major rate cut.

“At its meeting today, the Monetary Policy Committee (MPC) decided to cut the policy rate by 250 basis points to 15 per cent, effective from November 5, 2024,” the SPB said in a statement, adding that the Committee noted that inflation had declined “faster than expected and has reached close to its medium-term target range in October”.

It highlighted that a “sharp decline in food inflation, favourable global oil prices and absence of expected adjustments in gas tariffs and PDL rates” accelerated the pace of disinflation recently.

In its key developments, the MPC noted on a positive note that the International Monetary Fund (IMF)‘s Board had approved Pakistan’s new extended fund facility programme, which reduced uncertainty and improved prospects of external flows.

“Second, the surveys conducted in October showed an improvement in confidence and a reduction in inflation expectations of both consumers and businesses,” the statement read.

Furthermore, the Committee noted that the secondary market yields on government securities and Karachi Interbank Offered Rate (Kibor) had declined.

“Considering the developments, the Committee viewed the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5 – 7 per cent target range,” it said.

Most analysts had believed that the central bank would reduce its policy rate by 200 basis points in its meeting, marking the fourth consecutive cut since June, thanks to a decline in inflation, a low current account deficit and higher remittances.

Inflation numbers for October clocked in 7.2pc. The headline inflation, measured by the Consumer Price Index (CPI), had slowed to 9.6pc in August, the first single-digit reading in more than three years.

Inflation crossed 10pc in November 2021 and then remained in double digits for 33 consecutive months until July 2024. In between, it peaked at 38pc in May 2023.

To counter inflationary pressure, the SBP had gradually raised its policy rate from 7pc in August 2021 to a peak of 22pc by April 2023, in an effort to curb inflation. Since then, the rate has been lowered to 17.5pc as inflation began to ease.

In a survey conducted by Topline Securities, the brokerage firm noted that 85 per cent of market participants expected that the central bank would announce a minimum rate cut of 200bps.

“We believe that the larger rate cut expectations in the upcoming monetary policy meetings are driven by the single-digit inflation reading of 6.9pc in Sept 2024,” the firm said.

Consequently, it believed that SBP will continue to keep a positive real rate in the range of 300 to 400 bps in medium term in order to absorb any external and budgetary shock.

 

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Using the ADR playbook​

Mutaher Khan
November 4, 2024

For businesses around the world, quarter ends are usually a busy season. Sales teams are rushing to pump orders, marketing departments are trying to maximise reach their performance benchmarks and accountants are working to keep the books in order. It’s the adult version of pulling all-nighters to salvage exams after a semester of procrastination.

In financial institutions, this comes with a slightly different flair as some of the key performance indicators relate to the sale of not actual products but the line items on balance sheets. Consequently, there’s an opportunity to pump up numbers relatively easily, as long as you have liquidity from a few sources. A lot like when you are applying for a student visa and get that rich relative to deposit the required sum in the account as proof of income.

The technical term for this is “window dressing” — a practice that financial institutions have been engaging in since time immemorial. Typically, deposits and the asset base are the indicators of preference for the bragging rights they bring, but it can be anything. What happens is that bankers ofttimes turn to their friends in corporations or funds and seek short-term liquidity towards the end of the quarter.

However, the degree and type of window dressing at the end of September were a little different. Sure, a few funds and corporates may have placed a couple hundred billion in short-term deposits, but the more noticeable change was on the asset side, particularly in advances. According to the State Bank of Pakistan, loans to non-banking financial institutions (NBFI), such as microfinance or development finance entities, reached Rs446.4 billion — surging by Rs259.7bn in a single month. In other words, the increase was bigger than August’s outstanding amount.

With the return of the tax on failing to meet the minimum threshold of advances to deposits ratio, banks have gone on a lending spree

For context, the aggregate increase in net advances of microfinance banks between FY17 and FY24 has been Rs266.3bn — translating into a quarterly average of Rs9.5bn. Similarly, development finance institutions had a net loan book of Rs190.6bn as of June, having increased by an average of Rs4.1bn per quarter since FY17.

In simpler words, the NBFIs can’t absorb this much capital during a single month, at least for onward lending. So what’s happening here? Unfortunately, the story is both quite simple and familiar. In August, the tax on failing to meet the minimum threshold of advances to deposits ratio came back, which meant serious penalties for the sector as the figure stood at just 38.36pc by month-end.

Assuming the deposits maintain their past growth trajectory, they will reach Rs31.7tr by year-end. This means that the minimum advances by year-end to escape the tax altogether need to be at Rs15.85tr, compared to August’s Rs11.81tr. Thus began the effort to close the gap with just four months left.

To state the obvious, there’s no way banks could, or even would, lend Rs 4tr in such a short duration. So what can they do? Simple, turn to their less well-off buddies with smaller licenses and write them some big cheques, thus pumping the loans to NBFIs. In turn, those funds can be used by microfinance and development finance players to invest in government securities.

Remember, these are aggregate numbers with noticeable variance between banks. According to a previous analysis by Data Darbar, only four out of the 20 listed banks had an ADR of more than 50pc as of June. Now faced with the additional tax, the leadership seems to be doing whatever possible to get over the finish line, and one sure path is window dressing on steroids.

Data backs up this claim: between August and September, credit to the non-government sector increased by a total of Rs447bn, of which 60pc is made by loans to NBFIs. The remaining beneficiaries are probably the big corporates, particularly manufacturing which saw an uptick of almost Rs 80bn.

Funnily, this may not be the first time, either. The banks did the same back in December 2022, when loans to NBFIs helped improve the ADR by 423 basis points in a single month to avoid the tax, which was eventually deferred. Almost two years later, the playbook hasn’t changed at all and neither has the government learned anything.