The PTI government has given high priority to developing long-neglected labor-intensive sectors, creating more employment opportunities, accelerating documentation of the informal sector and increasing tax revenues.
Much of the effort is focused on providing access to subsidized bank loans to sectors such as small and medium-sized enterprises (SMEs) (including youth self-employment) and the housing and related construction industries. The latest step is to provide Rs 60 billion collateral free loans to SMEs over the next three years.
Most of the SMEs are in the informal sector and thrive on professional or manual skills, with very little or no material assets offered as collateral for lenders to lend.
Over the past five years (2016-2020), bank lending to SMEs as a percentage of total private sector financing has fallen from 9.2 percent to 7.27 percent.
In these turbulent times and with disruptive technology at work, bank loans versus collateral tend to overlook the critical role that entrepreneurship and intellectual insight play in the success of a business.
After all, IT giants are the most successful companies with very little material assets but a huge use of highly developed human skills and technology.
In these turbulent times and with disruptive technology at work, bank loans versus collateral tend to overlook the critical role that entrepreneurship and intellectual insight play in the success of a business
In some countries – where the contribution of SMEs to GDP was much higher than that of Pakistan – bank officials visited SME premises, discussed business problems and financial needs of potential borrowers, and helped them prepare balance sheets to determine their creditworthiness.
In Pakistan, microfinance banks have long been issuing small, clean loans based on the daily cash flow assessment of their clients’ business and with no collateral.
A program currently under development will allow potential SME borrowers with annual sales of up to Rs 150 million to borrow up to Rs 10 million based on their cash flow statement. The loans will be available at interest rates that are below the market price. The borrower would not be required to pledge his assets to the lender while borrowing for both fixed investment and working capital.
Banks are expected to develop innovative products and develop their ability to reach smaller borrowers while the government would provide a risk-sharing facility.
It may not be the most appropriate way to rely heavily on monetary policy / banking to fund the rapid development of labor intensive sectors and reduce unemployment and poverty. This is indicated by the slow start of bank financing for low-priced housing in a situation where banks’ bad loans are increasing. The infection rate rose from 8 percent in December 2018 to 9.3 percent in March 21, 2021.
Fiscal policy should be more targeted than monetary policy to reduce inequality, says Cecilia Rouse, who oversees the White House’s Council of Economic Advisers in the pandemic crisis. Monetary policy is a natural trickle, says Nobel Prize winner Joseph Stiglitz. “Fiscal policy can work from the bottom up.”
According to an analytical article in a leading US newspaper, US monetary policy makers generally agree that their policies cannot stop a pre-existing trend towards worsening wealth inequality. The report said the United States is providing monetary relief to both the poor and the middle class to support their incomes. The aim is to stimulate the economy from below and from the middle to ensure that the post-pandemic economic recovery is more robust and equitable than it would be without a proactive government response.
Similar efforts are underway in Pakistan, which have contributed to an early recovery. In the first phase of the Ehsaas Emergency Cash program, an amount of Rs 179.27 billion was reportedly paid out to 14.83 million beneficiaries, with each household receiving a grant of Rs 12,000.
According to a recent World Bank report entitled “Living Paper”, money transfers remain the main tool among the global social protection measures put in place in response to Covid-19. A total of 734 cash-based measures have been planned or implemented in 186 countries.
In the second phase of Ehsaas Emergency Cash, which is now officially under review and proposed to be launched in June, the number of targeted regular beneficiaries would be 8 million. Another 4 million beneficiaries with a higher entitlement threshold would receive one-off cash support.
On the other hand, the Prime Minister’s Special Assistant on Youth Affairs Usman Dar recently claimed that a total of 10,000 youth have benefited directly and 70,000 have so far obtained jobs through loans made under the Kamyab Jawan program.
Social safety nets like the Ehsaas Emergency Cash program stimulate consumption, demand and production based on people’s needs.
In the United States, economic relief amounts to $ 5 trillion during the Congress-approved pandemic. This dwarfs the amount spent on the last economic recovery after the great 2007-2009 recession.
The repeated US relief and stimulus packages are said to be a mosaic of tax credits, economic reviews and support for small businesses. Further relief for family support and infrastructure expenses are still to come.
The approach is a big change from the last recession, when the $ 800 billion incentive was insufficient to fill the void the recession left in economic activity. Instead, the US Federal Reserve was used for cheap monetary policy to pull the economy off the sidelines. The result was a sluggish recovery marked by growing inequality of wealth. The stock market soared while workers struggled for jobs.
At the beginning of 2007, the bottom half of the population had 2.1 percent of the national wealth, compared to 29.7 percent of the top 1 percent. At the beginning of 2020, the bottom half had 1.8 pieces while the top 1 had 31 pieces.
With fears of the economy overheating, the Biden government has reasons of its own. It is argued that the greatest risk is to understate things and leave millions on the sidelines of the job market to fight their way through another tepid rebound. A typical American worker has lost around $ 14,000 a year in wages, a study by economist Simcha Barkai reveals.
Published in Dawn, The Business and Finance Weekly, May 24, 2021