Why the State Bank of Pakistan has its hands full

Commercial banks' investment into safe and profitable government securities have gone up to over 94 per cent, leaving very little for the private sector to boost their business.

This was reported last week by the State Bank of Pakistan (SBP), while reviewing banks' operations in the second quarter of 2017. Yet another development is that the SBP has decided to investigate and closely supervise operations of Pakistani banks' branches located abroad to stop any wrongdoing.

One more question being widely asked by all: will the 'Trump effect' hit Pakistani business, banks and economy? Donald Trump, last weak, in a policy speech strongly criticised Islamabad for allegedly not doing enough to smash Pakistan-based terrorist groups, operating against US forces in Afghanistan and rest of the region. Trump was so harsh that Islamabad fears Washington may stop all military and economic aid to punish it.

The SBP in its review of commercial bank operations in the second quarter said: "The banks' share in investment in government securities rose to 94 per cent in overall investments. The investment was made in Pakistan investment bonds (PIBs), market treasury bills (MTBs), and sukuk, or Islamic bonds."

Out of the total investments, banks have placed 94.67 per cent, which totals Rs425.1 billion in government paper in the second quarter, which is 26 per cent or Rs87 billion higher than the same period in 2016. The major amount of Rs282.4 billion was placed in MTBs, while Rs131.4 billion was in PIBs and Rs11.4 billion in sukuk.

The SBP also says "the banks' higher investment flow in short-term MTBs is in contrast to last year, when more funds were placed in PIBs". The lower interest in PIBs and higher investment in MTBs reflects that "the banks are expecting the general price level in the economy, and, hence, the increased interest rates to rise in the future".

But at the same time, banks' investment in shares and listed equity has declined by 3.6 per cent and stands at Rs9.5 billion, due to recent volatility and downfall in the equity market. Tariq Bajwa, Governor of the SBP, announced last week that "we will strengthen our vigilance mechanism to monitor international operations of Pakistani banks working abroad."

"We will adopt a protective approach monitoring Pakistani banks' branches operating abroad, and ensure they do not make any unlawful transactions or transmission of funds to the terrorist outfits, working anywhere, including those in Afghanistan and Afghanistan-related terrorism," he said, while addressing the powerful Karachi Camber of Commerce and Industry in Karachi. Tariq said: "The latest happening at Habib Bank's [HBL] branch [in] New York City is not good for Pakistan. It is a matter of concern for all of us."

The New York State Department of Financial Services has shared some confidential information with the SBP regarding the alleged wrongdoing, unlawful transactions and transmission of fund, which HBL denies. The end-result is that a big, multi-million dollar fine has been imposed on HBL by the New York regulator. HBL, following this fine, has decided to close down the branch.

Bajwa also disclosed at the Karachi Chamber meeting that the SBP has signed the convention of the Organisation for Economic Cooperation and Development to implement tax treaty measures. Nearly 70 countries simultaneously have signed the convention, which will help them exchange tax and financial information between them.

Here is good news for overseas Pakistanis, working in the UAE, Saudi Arabia, as well as those back home: money changers will not be allowed to change customers' old dollar bills and charge an 'illegal commission'. Money changers lie to customers that "the old bills are out of use, and out of circulation". By telling them such lies, they deceive the customers and pay a reduced amount of cash, far lower than the open market and the official exchange rate. They often charge up to five per cent of the value of the dollar bill for changing an old $100 bill into a new dollar bill. The governor said: "I have issued instructions to banks to exchange such foreign currency notes, at par, on the prevailing official rates. No cuts will be allowed."

Prime Minister Shahid Khaqan Abbasi says "it will be counter-productive for the US to apply sanctions against Pakistan, or further cut military assistance provided for the ongoing war against terrorists. Any such move will hit both countries' fight against militancy."

The powerful American business group of around 60 US companies based ing Karachi, the American Business Council, says: "The current slide in US-Pakistan bilateral relations will, for sure, have a negative impact. We have some market intelligence for our few specified products where our clients are exploring options for sourcing products of non-US origion."

Miftah Ismail, special assistant to the prime minister on economic affairs, told Khaleej Times: "Yes, the situation is unfortunate and we wish to ease it quickly. We know that high sustainable growth target is difficult to achieve in an adverse diplomatic environment. We are concerned but optimistic over the current situation. Pakistan offers a hospitable business environment to big US brands such as P&G, IBM, Coke and Pepsi."

The SBP, bankers and businessmen all are watching. The question is what has the future have in its fist?

The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.

Source: Khaleej Times