WEB DESK: According to data released by the State Bank of Pakistan (SBP), commercial lending to the private sector increased to 352.3 billion rupees during the current fiscal year in comparison to 222.3 billion rupees in the comparable period of last year.
The SBP notes that “a significant part of this credit was availed by the private sector businesses … the improvement in credit to the private sector over the previous year was due to larger borrowing by the manufacturing sector followed by commerce and trade, construction and electricity.” This higher credit, in turn, translated into higher growth of Large Scale Manufacturing (LSM) sector that rose by 4.32 percent during July-February 2015-16 compared to 2.3 percent in the comparable period of last year. Within the LSM, automobile sub-sector registered the highest growth rate of 27.67 percent followed by fertiliser (16.95 percent), chemicals (11.2 percent), leather products (11.51 percent) and rubber products (11.64 percent). Significantly, most of the high growth rate sectors are not exporting their products and hence the decline witnessed in exports may well continue.
The increase in private sector borrowing, the SBP notes, is due to a reduction in government borrowing to meet its budget deficit targets that were agreed with the International Monetary Fund (IMF) under the 6.64 billion dollar Extended Fund Facility (EFF). The SBP in its quarterly report notes that the rise in government borrowing in fiscal year 2015 and the resultant crowding out of the private sector borrowing was a consequence of banks’ perceptions and government policy that led to commercial banks’ investment in government securities increasing by 667.6 billion rupees during H1 FY15 to 4,735 billion rupees.
These two elements were the outcome of: (i) commercial banks aggressively participating in primary auctions of longer-term securities as they anticipated a cut in the policy rate and took advantage of the healthy term premium on PIBs. The rate was subsequently reduced and it, as per SBP, ‘helped normalise the earlier disconnect between treasury bills and Pakistan Investment Bond segment of the yield curve’. (ii) Acceptance by government of massive sums in these auctions to lengthen the maturity profile of its debt (an objective repeatedly cited by the Finance Minister) and to substitute previously heavy reliance on borrowings from SBP which enabled the government to meet the limit of zero quarterly net borrowing from the central bank. This trend, the SBP adds, was made possible due to better availability of external funding.
Thus, the rise in commercial credit to the government last year can be attributed to a stronger government appetite for domestic credit given the Fund’s condition not to borrow from the central bank and, also, commercial banks’ perceptions of a better yield on government securities relative to the private sector. In other words, the reduced borrowing was not a consequence of a reduction in demand by the private sector.
Once credit was made available to the private sector, productive sectors including small-scale enterprises and LSM took advantage, leading to a rise in growth of credit. However, with the scheduled end of the Fund programme in September this year, when the last tranche under the EFF is likely to be released, the government would be under no compunction to follow the policies that are dictated by the Fund.
Additionally, the inclusion of a new structural benchmark during the recently-held 10th quarterly review – notably to prepare and submit a draft legislation for a public-private partnership (PPP) framework to the National Assembly reflects the donor concern with the government’s intention to extend sovereign guarantees. Such guarantees are likely to be extended to the 46 billion dollar loans to be acquired from the Chinese private sector under the China-Pakistan Economic Corridor (CPEC).
This would seriously compromise the government’s capacity to acquire loans from international donor agencies and bilateral deals. In other words, while the CPEC would generate an inflow of foreign funding, yet at the same time, without donor support it may lead to higher domestic borrowing by the government thereby leading again to crowding out the private sector from accessing credit with a consequent reduction in growth rate of productive sectors particularly LSM. The way forward for the government is to massively slash all expenditure other than what is critical, raise revenue from direct as opposed to indirect sources and deficit reduction should take a back seat in terms of priorities to growth.
Source: Business Recorder