THE total assets of State Bank of Pakistan increased by 4.6 per cent during 2011-2012, according to the central bank’s annual report.

The main source of this increase was purchases of saleable securities (up 77.3 per cent ) receivable balances of government current accounts, up from Rs58.8 billion in FY11 to an astronomical Rs12.744 billion in FY12. And investments went up 31.7 per cent, 99 per cent of which were market treasury bills.

Total liabilities rose by about 4.1 per cent, bank notes in circulation rose by 11.1 per cent and other liabilities more than tripled rising from Rs33.1 billion to Rs103.8 billion in the corresponding period. These included mainly unpaid dividend which rose from Rs8.4 billion to Rs21.7 billion and provision for receivable from India and Bangladesh staff retirement benefits (deferred) rose by 36 per cent.

The overall un-weighted equity to asset ratio increased marginally from 13.1 per cent in FY11 to 13.5 per cent in FY12. The SBP balance sheet cannot be said to have strengthened appreciably in the period under review.

The total SBP income rose from Rs206.2 billion to Rs294.3 billion. Net interest earned equalled to 76.4 per cent of total income in FY12 as against 98.1 per cent in FY11. The significant increase in these interest income was mainly due to a very substantial increase in foreign exchange gain — which rose from Rs1.9 billion to Rs42.8 billion.

However a major cause of the improvement is the accelerated depreciation of the rupee — thus earnings from foreign currency placements rose by 27 per cent in rupee terms but in dollar terms the gain was only 15.8 per cent. Nothing was earned from open market operations and currency swap arrangements in either FY11 or FY12.

Earnings under Exchange Risk Coverage Scheme declined from Rs22.2 billion in FY11 to Rs18.7 billion in FY12. Earnings from management of public debt and ‘others’ (no explanation is offered for this which amounts to Rs352.8 billion.. Exchange Rate Risk Income also declined in FY12. Exchange rate gain was also increased due to the very large fall in payments to the IMF which were halved — falling from Rs44.8 billion in FY11 to Rs21.9 billion in FY12 (again no explanation has been given for this unexpected fall).

SBP foreign exchange reserves amounted to Rs1.04 trillion in June 2012. The earnings to total reserves ratio thus works out at 4.12 per cent. This is significantly below the corresponding earning ratio for the Reserve Bank of India which is reported to be around seven per cent. However there has been a very significant improvement over FY 11. Although an exhaustive audit of placements etc., has probably not been undertaken, a custodian has been appointed to monitor the performance of foreign market fund managers. The share of foreign accounts in the reserve portfolio has however doubled in FY12. The distribution of SBP reserves by earning categories and by currency denominations is not reported by the central bank.

While management of foreign reserves have appreciably improved, interest income has also gone up by 9.5 per cent despite the gradual decline in the policy rate. Discount income has gone up by 15.7 per cent, reflecting increased borrowing from the SBP and the prevalence of market illiquidity.

SBP's interest expenses have declined by about 15 per cent in FY12. Net other operating income yielded Rs9 billion in FY12, but Rs6.1 billion was due to a revaluation of securities held for sale. Commission income declined marginally but dividend income rose by more than 30 per cent due to the stock market boom. SBP incurred a loss of Rs326.2 million on IMF SDR allocations.

Total expenses rose from Rs25.2 billion to Rs33.6 billion. Administrative expenses increased by 28.7 per cent and their share in total expenses was as high as 60 per cent. Salaries and staff benefits rose from Rs1.9 billion to Rs2.2 billion SBP remains an exorbitantly top heavy organisation with six figure monthly salaries being commonly paid to middle ranking executives and even higher consultant contracts.

Retrenchment is confined to old or senior employees and to lower level professional and operative cadres. Moreover retrenchment is enormously expensive. Retirement benefits and employee compensations for 'voluntary' dismissals cost the SBP Rs3 billion in FY12, up from Rs2.1 billion in FY11 (a rise of 43 per cent). In both FY11 and FY12 retrenchment payments were far and away the leading administrative expense. In FY12 it accounted for 38 per cent of total administrative expenditure and exceeded the annual salary bill by 37 per cent.

Improved human resource management should be a top order policy priority for the central bank management. Insufficient details are provided for salaries and benefits. No details of medical expenditure, foreign travel and other perks are provided.

Profit for the year has increased from Rs180.9 billion to Rs260.8 billion and the profit to asset ratio has risen from five per cent in FY11 to 6.9 per cent in FY12. Besides this, there has been an unrealised appreciation of the SBP gold reserves of Rs44.96 billion taking the comprehensive income for the FY12 to Rs305.7 billion. Profits after adjustment for non-cash items amounts Rs249.4 billion were up from Rs171.5 billion in the previous year.

Overall, the period under review has seen improvement in the financial performance of the central bank. Most encouragingly the bank has taken note — repeatedly stressed in these pages — of the urgent need to improve foreign exchange placement management and the foreign exchange earnings to reserve ratio has gone up from 0.14 per cent in FY11 to 4.1 per cent in FY12. Discount income has also improved significantly despite the continuing decline in the policy rate (and the mounting evidence of relatively weak passes through to deposit and loan rates).

Other operating income has also increased. On the other hand, administrative expenditure has risen very significantly and the bank staff redundancy policy is clearly unsustainable as it's our estimates of the net present value of deferred benefit obligations clearly demonstrates that human resource management strategy needs a fundamental revamp as graphically illustrated by the fact that training expenses have fallen from Rs9.1 million in FY11 to Rs2.1 million in FY12.

Redundancy payments have risen from Rs2.1 billion in FY11 to Rs3 billion in FY12. The SBP allocates about 0.02 per cent of its administrative expenditure to training its staff, but it allocates 37.7 per cent of its administrative expenditure on getting rid of its employees. Surely "there is something rotten in the kingdom of Denmark". SBP direly needs a human resource management revolution.

Javed Akbar Ansari is a professor of economics and finance at the DHA Suffa University.