Lending from commercial banks to the private sector nosedived during the first five months of fiscal 2022-23 (Jul-Nov.) , falling 16 times as compared to the same period last year.
Among several reasons behind the sharp decline in lending to private sector, prevailing political instability remains at the top of the list. A record high interest rate is also believed to be a reason behind significant drop in private sector borrowing.
Lending to this sector —considered as the key driving force behind the economic activities — during the July-Nov period remained just Rs.27.5 billion, as compared to Rs. 470 billion during the same period last year.
Bankers believe that giving loans to private sector, at a time when inflation is growing back during this time of growing inflation and in the face of high interest rate could be overwhelming for their institutions since the default rate could go much higher and could put the financial sector in trouble.
The State Bank of Pakistan (SBP) has increased the policy rate by 100 basis points to 16% which slowed down the borrowing by the private sector and consequently further depressed the growth.
Bankers fear that the central bank could for further increase the interest rate, as this is apparently consider it is the only tool available to them to control the bullish inflationary pressure. However, they seem to be oblivious to the fact that such a policy has not yet worked in Pakistan despite very low lending to the private sector.
JP Morgan analysts, in a recent report said that Pakistan needs to raise the interest rate by 400 basis points by the end of the fiscal year 2022-23 to calm down the inflationary pressure.
“Many businesses are concerned at the JP Morgan’s report that domestic interest rate may reach 20pc [from the existing 16pc],” said Faisal Mamsa, CEO of Tresmark, a terminal that tracks live prices of financial markets.
“An anticipated slowdown in raising rates by Fed will make our regulators less hawkish, especially if they are able to control the external deficit and inflation issue,” Mr Mamsa said.
Tresmark estimated Pakistan’s reserves to fall below the $6 billion mark next week.
Analysts were of the view that the recent hike introduced by the central bank in the interest rate had been done at the behest of lenders and does not translate into a trend.