Pakistan’s central bank aims to spur lending to small companies, farming and housing in the next three years to boost growth in an economy where government borrowing has curbed credit and kept interest rates elevated.
“These three areas have to be stimulated and will become engines of growth,” Governor Yaseen Anwar, 60, said in an interview at the State Bank of Pakistan in Karachi on March 2. He forecast the economy will expand by 3 percent to 4 percent in the year ending June.
Anwar has kept the benchmark rate at 12 percent since he was officially made governor in October, refraining from adding to two reductions in 2011 as the nation grapples with the fastest inflation in Asia after Vietnam. He said government borrowing is impeding credit, as insufficient tax collections force Prime Minister Yousuf Raza Gilani’s administration to turn to central bank funding to finance flood rehabilitation and a war against militants in the northwest.
“The State Bank cannot do much in isolation without the government taking some very basic corrective measures,” said Nasim Beg, executive vice chairman of Arif Habib Investments Ltd. in Karachi, which oversees 35 billion rupees ($385 million) in stocks and bonds. “The government will be likely to go for aggressive populist spending early in this election year and worry about meeting revenue targets later -- more pressures for the governor.”
As acting central bank chief after Shahid Kardar resigned in July citing policy differences with the government, Anwar cut rates by 2 percentage points before pausing. Kardar had blamed state spending for fanning prices, and he and his predecessor, Syed Salim Raza, both quit before completing their three-year terms at the monetary authority.
Anwar, who worked at Merrill Lynch & Co. and Bank of America Corp. in his 33-year career before joining the State Bank, cited the government’s commitment to “zero borrowings” from the central bank as one of the reasons for reducing rates in July.
“We need attention on the revenue side in terms of tax reform,” Anwar said, adding he thinks the government may meet its collection target of 1.95 trillion rupees in the year ending June 30. The ratio of tax to gross domestic product, which the finance ministry estimates is 9 percent, “has to go up into the teens,” he said.
Only one in 10 Pakistanis pay taxes, limiting the government’s ability to fund a budget deficit that the International Monetary Fund estimates may widen to as much as 7 percent of gross domestic product this year.
Tapping the potential in small and medium companies, agriculture and housing will increase Pakistan’s annual growth rates to “much higher levels,” said Anwar. Agriculture accounts for 21 percent of GDP and needs to be “harnessed” and housing finance, which accounts for less than 1 percent of GDP, has “huge potential,” he said.
Bank loans to farmers rose 20 percent to 149.7 billion rupees in the seven months ended Jan. 31, according to the central bank. The central bank’s target for farm lending is 285 billion rupees for the year ending June 30.
Pakistan faces faltering growth following floods in 2010 and 2011 and an insurgency near the Afghan border. The disasters, security risks, elevated price pressures and a budget shortfall have left the economy “highly vulnerable,” the International Monetary Fund has said. The $175 billion economy, which is due to hold general elections by next year, grew 2.4 percent in the year through June 2011, one of the smallest expansions in a decade.
The Pakistan rupee is down about 6 percent against the dollar in the past year on concern foreign reserves will shrink as international aid dwindles. Anwar said the central bank has intervened to the tune of $1 billion in the currency market since July to “curb speculative activity.”
Pakistani inflation accelerated to 11.05 percent in February, the second-fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg. Government borrowing rose 25.8 percent to 440 billion rupees from July 1 to Feb. 3, according to the central bank.
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