Saturday, August 21, 2010

SBP for reviving economic activities in flood-hit areas

Staff Report

KARACHI: Acting Governor State Bank of Pakistan (SBP), Yaseen Anwar has announced new initiatives and setting
up of four committees of banks for the revival of economic activities in the flood-affected areas of the country.

Presiding over a meeting of the Presidents/CEOs of all banks at SBP Karachi on Friday, Anwar disclosed that SBP
has decided to make available SBP refinancing schemes at concessional rates for agriculture and small businesses
in flood-affected areas as well as grant relaxations in provisioning requirements for loans tied up because of this
tragedy, and appropriate credit guarantee schemes to share losses with banks to encourage them to extend fresh
loans in these areas. He said these initiatives are ready to be announced as modalities are finalised in consultation
with all stakeholders.

He also said that the committees would be on SME Finance, Agricultural Finance, Microfinance and General Relief
Activities. While the Flood Relief Committee of Pakistan Banks Association (PBA) will coordinate with banks to
channelise flood relief measures to the flood victims. The other three committees will put forward their
recommendations for the immediate relief and smooth flow of credit to the flood-affected people of the country, he
added.

Acting Governor SBP underscored the need to provide the requisite financing facilities to farmers and small
businesses to help them in restoring their businesses.

Yaseen Anwar said that SBP would be convener of the meetings of these committees. SME Finance Committee will
include senior level members from HBL, NBP, Faysal Bank, Standard Chartered Bank, Bank Al-Falah, Meezan Bank
and NIB Bank. Agriculture Finance Committee will comprise representatives from NBP, HBL, Faysal Bank, UBL,
Askari Bank & ZTBL. The Microfinance Committee will include representatives from HBL, NBP, Khushhali Bank, First
Microfinance Bank, Tameer Microfinance Bank and Kashf Microfinance Bank.

The first meeting of these committees will be held on August 24, 2010. Acting Governor SBP assured the banks
that the central bank would provide all necessary assistance to the banks to facilitate the flow of credit to the flood
victims.

He said the catastrophe is of vast magnitude and we should come forward and help the affected people. “We will
do whatever we can within our regulatory domain to make available liquidity to the banking sector without
jeopardising the stability of the financial system,” he added.

The representatives of the banks informed the meeting about the various steps that are being taken by them for
the flood victims. Yaseen Anwar appreciated the efforts of the banks but emphasised that the magnitude of the
catastrophe is very high. Hence, “we all must play our part in redressing the grievances of the affected people by
extending all possible help to them,” he added.

Yaseen Anwar emphasised upon the banks to provide relief to their existing borrowers and make provision for fresh
financing for the revival of economic activities in the flood-affected areas of the country. He asked the banks to put
forward their recommendations for the facilitation required from the central bank, to provide relief to existing
banks’ borrowers and to continue fresh financing. He informed the meeting that the volume of NPLs in the flood-
affected areas would increase substantially. According to the initial estimates, the total NPLs would over Rs 48
billion in the flood-hit areas, he added.

http://www.dailytimes.com.pk/default.asp?page=2010%5C08%5C21%5Cstory_21-8-2010_pg5_8

Coping with the flood-hit economy

By M. Sharif

Torrential monsoon rains accompanied by catastrophic floods across the country, violence in Karachi and
constrained inflows from donor organizations have changed economic outlook negatively for current fiscal year with
clear indications that three critical fiscal targets of fiscal deficit (4.0%), inflation (9.5%) and growth (4.5%)
projected for current fiscal year might be missed. The government has viable options to come out of fiscal stand-off
provided it demonstrates political will, fiscal acumen and makes concerted efforts to address people’s woes through
judicious use of available resources. The real challenge is about rising to the occasion, reshaping economy and
pulling it out of a situation that is partially made by factors beyond human control and partially made by decades of
mismanagement and indifference towards effective flood management strategies.

Agriculture sector stands crippled by the worst floods in last 80 years. According to UN estimate damage caused by
them is more than 2005-earthquake in Pakistan, 2004-tsumani and January 2010 Haiti earthquake. More than 14
million people mostly linked with rural economy have been displaced with heavy losses to their houses, farmland,
standing crops and livestock. Road and irrigation infrastructure, public buildings, power distribution network and a
large number of small and large bridges particularly in KP province have been damaged badly in addition loss of
more than 1600 human lives. Recently built Munda dam in KP has been wiped out. It would render 150000 acre of
land cultivated by it uncultivable.

In Punjab and Sindh cotton and sugarcane crops have been damaged to the extent that both the commodities may
have to be imported. The cost of vegetables and other agriculture commodities has already registered a steep
upward trend. It coupled with commencing of holy month of Ramadhan is fuelling food inflation that would make
difficult to contain overall inflation despite recent hike in discount rate. CPI during July has registered 12.34 %
increase on y-o-y basis. The government has approached WB and ADB for damage assessment. It will take
sometime before fixing realistic overall damage and damage done to agriculture sector. Nevertheless, it is being
feared that 4.2 percent projected growth of the sector is unlikely to be achieved. The loss could be between 1.0
percent and 1.5 percent. This would pull down overall economic growth by around 1.0 percent, according to initial
estimate. The other important factors that could affect economic growth are lack of strong private investment
particularly FDI and financial support by international community.

Second important issue relating to agriculture sector is cost of rehabilitation of displaced persons and small
farmers, irrigation infrastructure and system at enormous cost that could run into billions of rupees. Cost of
rehabilitation of small farmers in all the provinces will be enormous for enabling them to restart farming activities
after colossal financial losses that have literally made them penniless. The important question is; where from huge
sums would pour for rehabilitation of people and economy. There are three financial sources that can be utilized
during this hour of national need: domestic and foreign aid and aid by the federal and provincial governments.

Domestic and foreign aid is not making headlines as they made during 2005-earthquake mostly because of the
“fatigue” factor that is understood to have crept in particularly in international community. According to UN
estimate billions of USD would be needed to compensate the people and the state and relief operations will have to
be, “massively scaled up.” UN has appealed to international community for financial aid of $ 330 million for
immediate relief operations. According to an optimistic estimate around half-a-billion USDs in foreign aid may pour
in. Substantial aid of items of daily use from friendly countries has started arriving for relief operations but keeping
in view the needs of millions of people affected by the floods relief operations are yet to gain the required help and
momentum. With this emerging scenario of foreign assistance, it is quite likely that this time the financial cost will
have to be borne by the federal and provincial governments and the people of Pakistan themselves. It would not be
without deep implications for economy unless decisions are taken in the larger interest of economy and the people.
What options do the federal and provincial governments have to shoulder financial responsibilities of flood-hit
areas, people and economy? It is understood that there are not too many options given fragile state of
macroeconomic stability existing at present.

The government projected fiscal deficit of 4.0 percent for current fiscal year. Prior to floods it was doubtful if the
government would meet the target for a variety of reasons, conspicuous among them being it’s continued
expansionary policy (the government printed Rs 65 billion during first two weeks of current fiscal year for deficit
financing), inability to increase tax-to-GDP ratio and over dependence on domestic and foreign loans; the latter
have reached level of dryness. The floods have added new dimensions to volatile macroeconomic environments on
a few subtle accounts that will take time to stabilize them.

The federal government hardly has fiscal space to step forward in a big way to provide financial assistance to the
provincial governments. Punjab province has asked for financial assistance of Rs 25 billion. Similarly, other
provinces are expecting huge financial assistance. The federal government’s projected fiscal deficit of Rs 685 billion
is already in troubled state to spill over on account of lack of any fiscal support against projected surplus of Rs 167
billion from the provinces. Financial support by IMF and WB is linked with enhancing tax revenue by imposing
either VAT or improved GST from 1st October, 10 and all encompassing improvement in governance respectively.
The government for once should address these long awaited tricky issues. Further delay would be hardly in the
interest of either economy or government. It is understood that the government is making a realistic assessment
of changed economic outlook due to floods and revising some of the budgetary targets downward for presentation
to the IMF during economic review to be held in Washington by end of August, 10.
Borrowing from domestic financial market would be expensive because of increase in discount rate. Printing
currency for deficit financing is not advisable as it will have a spiraling effect on inflation. Perhaps the only option
left for the federal government is to divert part of development expenditure of Rs 290 billion to the provinces for
rehabilitation and reconstruction of flood hit areas. Despite such constraints the federal government needs to
restrain itself from adopting a fiscal expansionary course any further to avoid ballooning of fiscal deficit that stood
at 6.2 percent of GDP for last FY and fuelling inflation any further. Provincial governments share have an enhanced
share of Rs 373 billion in PSDP dished out to them under the new NFC award. It provides them reasonable space to
divert substantial amount towards rehabilitation of flood hit areas and people.

More important than statistics about foreign aid or diversion of development funds by the federal and provincial
government towards rehabilitation is to focus on judicious use of finances by the officials associated with
rehabilitation projects. Unless limited funds are used carefully with focus on reaching to affected people and
making rehabilitation of people and infrastructure an enviable achievement the fear of increase in inflation that
according to SBP forecast would be real. According to SBP report, “The damage to crops, supply disruption of
essential food commodities and impact of reconstruction and rehabilitation costs on government finances has
significantly increased inflation risks.” The government needs to be conscious about it because it is the only viable
way of keeping fragile macroeconomic recovery on its course in the wake of natural disaster that has hit the people
and economy catastrophically.

http://jang.com.pk/thenews/aug2010-weekly/busrev-16-08-2010/p3.htm