The central bank has announced revisions to its bank financing framework for private sector wheat purchases. Based on initial impressions, it appears to be a mix of welcome milestones, peppered with over-regulatory concerns.
One of the most obvious changes this season is the authorization to provide bank financing for imported wheat. Readers will recall that this is a marked departure from a circular issued just two weeks ago in which banks were instructed to restrict seasonal credit to wheat millers to local purchases only.
This is not only a positive development given that the federal government had previously announced plans for an import quota of 5 million tonnes of wheat (total for public and private sector imports). Now, with access to cheap bank finance, private sector involvement in importing wheat may be more pronounced than last year. But more importantly, the move bares the central bank’s own estimates of domestic wheat production during the current season and confirms widely held beliefs that it may fail to meet domestic demand.
Likewise, SBP exempted banks from requiring a 10% cash margin against bank funding, freeing up liquidity in the system. Already, formal sector wheat millers with access to bank credit are scarce, and the cash margin requirement only creates additional complications, pushing up domestic prices.
To put things in perspective, PASSCO and the provincial Food Departments last year borrowed an additional Rs 60 billion credit for the purchase of wheat from commercial banks. It should also be remembered that the additional debt is added to a “mini” circular debt already accumulated at nearly Rs 700 billion (both for PASSCO and the provinces), a large part of which has become hardcore. In contrast, total funding for private sector wheat pledges peaked at just Rs 18 billion during the private purchasing season. Talk about the foreclosure effect!
But there is much more wrong with the policy of financing wheat purchases, which probably goes beyond the periodic circulars issued by the SBP. On the one hand, the availability of bank financing after July 1 means that for all intents and purposes, the private sector can only be eligible to access credit if it sources from government food departments. And this discrimination is both implicit and manifest.
On the one hand, because PASSCO and the provincial food departments buy during the peak harvest period – March 15 to May 30 – the availability of credit to the private sector after a month of delay means they are discouraged. to participate in direct purchase from farmers. On the one hand, it helps the optics as the SBP is seen to support government procurement goals. On the other hand, this goes against the spirit of SBP’s own research, which – unsurprisingly – has found that bureaucratic inefficiencies in government operations only add friction and transaction costs. , resulting in deadweight loss.
Second, the circular notes that “banks may provide a financing facility to functioning flour mills for the purchase of native wheat from their authorized representative and the respective food department against the supply of wheat by them”. While on the surface it may appear that the private sector is allowed to source from sources other than food departments, the tone of the circular will ensure that commercial banks err on the side of caution, given how point they are petrified of attracting regulatory scrutiny even in normal times, let alone at a time when the country is in the grip of spiraling grain prices!
Some necessary restrictions have also been added. For example, banks are not allowed to assess the revaluation of pledged stocks or to disburse a funding amount that is differential against them. Although the condition may seem anti-borrower, it leads to moral hazard when the borrower is induced to participate in price speculation in order to obtain additional bank financing, without acquiring additional stock of wheat.
But above all, a central bank eager to seek operational independence must ask itself why its wheat supply policy is still so perversely tilted in favor of government operations on commodities. At present, there are no regulatory hurdles in place that could force SBP to support Food Department objectives at the expense of private sector procurement, even though the latter may better facilitate the process of discovery. commodity prices. Is the central bank afraid of offending its biggest credit client?