KARACHI: Former central bank governor Syed Salim Raza came out on Monday with all guns against the subsidy-hungry private sector that survives on taxpayers’ money despite massive inefficiencies.
Addressing a seminar organized by the Pakistan Institute of Development Economics, the former governor of the State Bank of Pakistan (SBP) said the government had taken a step back from economic planning during decades, resulting in an inefficient private sector and “largely lacking pockets of industrialization”.
“Our whole private sector lives off massive subsidies,” said Raza, who led the SBP from 2009 to 2010.
He also criticized the notorious Temporary Economic Refinancing Facility (TERF), a long-term subsidy program for importing machinery launched during the pandemic.
Advises the government to borrow from mutual funds rather than banks
“It’s a 10% subsidy. And a large part (500 billion rupees) was spent on textile factories. More in spinning, a little less in weaving. So we come back to yarn and fabric. He didn’t go into clothes…anything that would give our textile an edge to compete with the rest of the world. Was it helpful? What are we going to do with big business, which has such influence over how policies are made? »
Mr. Raza spoke at length about the problem of domestic debt, which has become a “serious bottleneck” in the government’s spending capacity. Growing debt repayments are driving a higher budget deficit and clogging commercial banks’ balance sheets, he said.
“About 80% of government borrowing goes through banks, which is an astronomical figure compared to other emerging markets. More than 45pc would be very rare elsewhere,” he said.
As much as 54% of banks’ loanable assets are now invested in government securities, he said. That’s on top of about 12-15% government-backed bank loans, leaving about 33% for the rest of the market, he said.
“Because the government is so dependent on the banks, it pays a premium to borrow from them… This is nonsense. It’s illogical. Is the government bailing out the banks or are the banks bailing out the government? It should be the other way around,” he said.
The solution to this structural problem, according to Mr. Raza, is for the government to abandon the banks and start borrowing from mutual funds. “Create national mutual funds, get bank depositors to switch from low-paying term deposits to high-paying treasury bills through fund managers. These fund managers can be from the government. SLOW [National Investment Trust] can become one of those,” he said, drawing the government’s attention to the “huge sums of money” it can raise from banks and into its own mutual funds.
This will lower government borrowing rates and increase the rates banks pay to depositors. The government will become the benchmark against which all interest rates will be raised, he said.
“It happens all over the world. There is more US government security paper held in money market funds – 10 times more – than held by banks. It’s the complete opposite here,” he said.
Posted in Dawn, April 26, 2022