Private sector stops borrowing from banks,

starts retiring debt

Shahid Iqbal Published 2 days ago
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KARACHI: The private sector has stopped borrowing from banks and has instead started retiring
the debt it accumulated in the first half of the current fiscal year.
The bizarre situation developed during the third quarter as the fast growth in credit off-take by
the private sector during the first half of the fiscal year dropped, negating the governments claim
that the friendly economic environment had attracted the private sector to increase their
participation.
According to the State Bank of Pakistans (SBP) report, the private sector credit (PSC) expanded
by Rs352.9 billion in the first half of FY16, against the Rs222.3bn in the same period last year.
The SBP explained that the expansion in PSC was broad-based as a large number of sectors,
including textiles, fertiliser, retail trade, construction and electricity, availed higher credit in
FY16.
The SBPs latest report of almost 10 months (July-April) indicates that private-sector borrowing
slipped to below Rs300 billion, coming closer to borrowing made during the same period last
year. The SBP reported PSC off-take of 10 months as Rs296bn compared to Rs204bn in the
corresponding period.
The myth that government policies have improved the economic environment for investors has
proved to be wrong with the quick fall in the private sector credit off-take. The government
hopes it would achieve an economic growth rate of 5pc against the projected target of 5.5pc for
this fiscal year and the main thrust is on the China-Pakistan Economic Corridor and the
construction industry.
Builders and contractors said on Thursday that recent political upheavals emerging out of the
issue of Panama leaks has stated damaging property prices that could see slower growth over the
next six months.
The biggest attraction for the private sector, according to the government and the State Banks
reports, was the low interest rate. However, that too proved wrong as it failed to generate demand
for credit. The expectations of economic managers that the private sector would benefit from
cheaper money fell apart. Despite higher revenue generation compared to the last fiscal year, the
government still depends largely on borrowed money from the banking system to meet fiscal
deficits.

The government has so far borrowed Rs1.072 trillion from scheduled banks during the slightly
less-than-10-month period, compared to the Rs1.280 trillion in the same period last year.
Fiscal authorities resorted to financing their deficit through borrowings from external sources
and commercial banks. As a result, they were able to retire SBPs debt of Rs346 billion during
the 10 months. This shift in borrowing from SBP to commercial banks is aimed at meeting the
IMFs targets.
The State Bank, in its second quarterly report, said the developments in the credit market were
encouraging.
Higher expansion in PSC is attributable to the improved business environment (better security
situation and improved energy management), lower cost of borrowing; and modest risk premium
for banks, said the SBP report, which no longer seems relative to the development in the
remaining part of the second half of the current fiscal year.