Small savers in Pakistan face an uncertain future

Small savers in Pakistan face an uncertain future

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The month of June witnessed a new 14-year record with consumer prices registering a 21.3% growth in June compared to the same month in the previous year. This increase was much higher for rural areas (23.6%). A couple of factors are at play here. Even after bringing imports to a screeching halt, the higher prices of (imported) fuel and food continues to have an adverse effect. This continues to get translated into higher industrial and residential electricity bills. Industries manufacturing for domestic consumption who had safe inventories of raw materials also adjusted the end-prices upwards anticipating the impact of the weakening of the rupee.  

While signs of contraction in large scale manufacturing sector are now visible, these could become acute as the Central Bank has raised the key interest rate to a new high – not seen in the past 11 years. For the small and medium enterprise (SME) sector, high inflation and weakening of rupee has resulted in erosion of retained earnings and working capital after which several business associations were seen in mid-July prompting large scale closures. It is about time that federal and provincial industries departments start consultations with small business associations with a view to prevent these worst case scenarios.   

While the Ministry of Finance is betting on the beginnings of a global recession which could result in reduced prices of global fuel and food, a significant reduction is not expected for the majority period of the ongoing fiscal year. In fact, the oil and gas price volatilities seen due to the Russia-Ukraine tiff could get even more exacerbated. 

As the federal government and central bank huddle to protect the economy from default, attention has moved away from the state of small savers in the country who are fast becoming poorer by the day. This segment has been hit by inflation and also a more uncertain labour market where their bargaining power has significantly dropped. Private sector employers are sharply rationalizing staff costs in a bid to pivot. Unless they quickly adapt, private sector debt default could also become imminent, in turn putting pressure on banking sector’s balance sheets.

The government is advised to look towards peer economies who face similar external account and fiscal challenges but have continued to insulate small savers.

Dr. Vaqar Ahmed

Under such a milieu, the worse that could happen for the small savers was regulatory uncertainty in financial and real estate markets. Earlier in July, the statement from the Central Bank pointed towards a suspension of the Mera Pakistan Mera Ghar (MPMG) scheme. Thousands of existing applicants under this scheme took to banks to seek information about whether they could lose their deposits and houses.  

For those who were either planning to or had arranged resources to subscribe to MPMG, the news was even worse i.e., the scheme will remain suspended until the federal government is able to revise its features.  

Even the applicants who have been approved - having incurred transactional costs of ensuring documentation, haven’t seen disbursements in the recent past. Applicants who had moved-in after making partial payments now are being forced to move out by the owners. Their already paid valuation fee, token amounts, or partial payments have become a sunk cost.   

A female applicant whose case stands approved has recently stated on media: “I am a victim of the MPMG Scheme as I paid the valuation fee and after the bank approved the property I also paid 10% of the property value to the seller to confirm the deal. The token amount paid was 9 lakh and now my sale agreement time period is near to end and (with no further instalments in sight) the seller is not agreeing to give more time.”  

A wider majority who was out of this scheme but had arranged resources on their own were involved in construction on already purchased land. Since July 1, contractors in most urban areas have escalated construction prices by 30% plus, attributing this to the hike in prices of basic and intermediate construction materials. Higher taxes have now been notified and fiscal relaxations provided to the real estate and construction sector since the outbreak of COVID-19 are no longer in place. While the increased tax burden on non-filers may find its justification with some, increasing tax rates for filers trying to enter the property market is a bit unjustified under already difficult economic conditions.  

The government is advised to look towards peer economies who face similar external account and fiscal challenges but have continued to insulate small savers. Asset ownership is the best hedge against rampant price inflation and creation of greater number of small asset owners is a sure recipe for lifting people out of poverty.  

— Dr. Vaqar Ahmed is an economist and former civil servant.

He tweets @vaqarahmed 

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