The interest rates are down and are expected to stay there in the near term. But so are the private sector interest levels, which have refused to grow for quite some time.
The latest SBP credit numbers repeat the same old story of muted private sector growth, with the bulk of credit serving the governments appetite.
You would normally expect private sector credit to gather pace and in return spur economic growth, when the interest rates are receding – but even after accounting for time lag, it does not appear to be going that way.
While banks reluctance to lend to the private sector is well documented, it must be mentioned its not only a supply side issue. Market watchers opine that the private sector has not created enough demand to wake the banks out of slumber.
The recent commodity price softening too took its toll on private sector credit, as working capital needs reduced significantly. The State Bank of Pakistan in its latest quarterly report has also pointed out the demand side weakness arising mainly from soft commodity prices.
The investment in government securities on the other hand continues to comfortably outpace private sector credit. The recent easing in the policy rate is still newish and the theoretical time lag of six months is yet to be reached at.
But, the rates have not exactly been static in the past six months, having come down 150 bps in four months leading to March 2015. Yet, the private sector credit has not followed the theoretical patterns – asserting the issues lies elsewhere.
On the other hand, the disconnect between PIBs and t-bill yield curves still persists, also aptly pointed out by the SBP – which further affirms the notion while banks are in no hurry to alter their asset mix strategy.
For the monetary policy to be efficient and for it to help achieve the means of economic growth, macroeconomic structural issues need utmost attention. Needless to say, energy continues to sit on top of the most chronic problem. Till then, you would continue struggle trying to find a predictable pattern between interest rates cycle and private sector credit.
Source: BR research