Credit to private sector keeps downward trajectory.

Byline: S. Kamal Hayder Kazmi

According to the State Bank of Pakistan (SBP) report, the credit to the private sector continued its downward trajectory in H1-FY20, as businesses continued to scale down their activities and increasingly resorted to internal financing. This trend was consistent with the subdued industrial production (largely LSM) and a broad-based fall in imports during the quarter. Notably, the entire offtake was driven through working capital loans; in case of fixed investment loans, net retirements by non-manufacturing sectors like construction, power and transport greater than offset the rise in manufacturing sectors' loans.

Recently the State Bank of Pakistan (SBP) has cut the benchmark interest rate by 100 basis points to 8 percent to assist citizens, businesses and the economy fight against the coronavirus pandemic. This decision reflected the monetary policy committee's view that the inflation outlook has enhanced additional in light of the recent cut in local fuel prices. The interest rate no doubt is a tool obtainable with SBP to create a balance between the rate of inflation and economic activities in Pakistan.

It is also recorded that the coronavirus pandemic has created unique problems for monetary policy because of its non-economic origin and the temporary disruption of economic activity required to combat it. According to the SBP report, the rise in the stock of working capital loans in H1-FY20 was only a quarter of the rise observed in H1-FY19. This trend was showed both by lower offtake by textiles and rice processing sectors, also deleveraging by the sugar, petroleum refining and edible oil units.

In case of export-oriented sectors, the SBP's experts also revealed that the lower bank financing despite visibly buoyant sectoral activity largely represents better liquidity situations this year because of higher export values in Pak rupee terms, and a relatively smoother release of tax refunds through Federal Board of Revenue (FBR). Due to these factors, companies were not keen on borrowing against the SBP's concessional Export Finance Scheme (EFS). Borrowing under EFS in fact declined to Rs 42.5 billion in H1-FY20 from Rs 58.0 billion in H1-FY19. Meanwhile, some exporters opted for foreign currency financing for trade purposes, given that rates on this type of financing were close to those on EFS. Furthermore, as it turned out, exporters were more drawn towards this financing; probably firms not eligible for EFS...