Private sector faces continued negative bank lending amid economic challenges
The State Bank of Pakistan (SBP) has released data
underscoring the persistently challenging economic landscape, with bank lending
to the private sector remaining negative in the first half of the current
fiscal year.
From July 1 to December 15, the private sector experienced a
net debt retirement of Rs41 billion, in stark contrast to the net borrowing of
Rs141 billion recorded during the corresponding period last year.
The data reveals a sharp decline in bank advances to the
private sector, amounting to just Rs208 billion in FY23, compared to Rs1,329.7
billion in FY22, contributing to the overall contraction of the GDP for the
year. Presently, various macro indicators indicate a grim economic outlook,
with banks opting for substantial investments in risk-free, high-yielding
government papers yielding returns of more than 22%.
73%
drop in bank advances to private sector indicates economic slowdown
Despite the government's economic growth target of 2-3% for
the current fiscal year, Large-Scale Manufacturing (LSM) production contracted
by 4.08% in October on a year-on-year basis. Sectors such as textile, paper and
board, iron and steel products, electrical equipment, automobiles, and
furniture were the primary contributors to this negative growth. LSM output
also contracted by 0.4% during July-October FY24, according to PBS data.
Analysts express surprise at the economic challenges,
questioning the feasibility of economic growth without a steady supply of
liquidity. The negative lending to the private sector is attributed to the high
cost of borrowing, causing banks to hesitate in lending money to the private
sector, given the 22% policy interest rate.
World
Bank warns of increasing exposure of Pakistan’s banking sector to sovereign
borrowing
Some bankers suggest that the recent equity market rally
attracted significant amounts from banks, helping them generate more profits
before the Pakistan Stock Exchange (PSX) experienced a substantial correction,
losing over 11% since December 12. Banks also managed to avoid a 40% tax on
windfall profits after obtaining stay orders from the courts.
Analysts note that the government's heavy borrowing from
banks leaves little room for the private sector. The allure of risk-free
substantial profits from government papers is cited as one of the reasons for
the reluctance to lend to the private sector.
Commercial banks reported a net debt retirement of Rs51.4
billion compared to net lending of Rs262 billion in the same period last fiscal
year. However, Islamic banking branches of commercial banks recorded a net
lending of Rs13.1 billion to the private sector, contrasting with a net debt
retirement of Rs151 billion in the same period of FY23.
Despite this, Islamic banks also noted poor performance,
with net debt retirement of Rs2.6 billion during this period against net
lending of Rs31.4 billion in the same period of FY23.
Source: Pakistan Today