Private sector borrowing hits record high

CARACHI:

Despite a significant increase in the cost of credit in the fiscal year just ended, the private sector took on record borrowing to finance its projects as demand for its products grew, suggesting widespread business expansion.

The private sector cumulatively borrowed 1.44 trillion rupees in the previous financial year 2021-22 (until June 28), or 142.5% (or 848 billion rupees) more than 595 billion rupees in the during the same period (July 1, 2020 to June 28, 2021) of the previous financial year, according to the Central Bank of Pakistan.

Outstanding credit to the private sector reached 8.17 trillion rupees at the end of May 2022, compared to 6.64 trillion rupees a year ago, on May 31, 2021.

“Credit to the private sector recorded an unprecedented and broad-based expansion in FY22,” the State Bank of Pakistan (SBP) said in an analyst briefing on Thursday after the monetary policy announcement. .

“Credit to the private sector rose a further 2% month-on-month in May, driven by favorable developments in sectors such as energy, edible oil, construction-related industries as well as wholesale and retail trade,” the SBP said in its latest monetary policy. Declaration (MPS).

“Demand for fixed investment and consumer loans has also picked up, reflecting robust economic activity.”

Central bank data suggests that industrialists borrowed a total of 422 billion rupees for fixed investment (investment for the establishment of new businesses and/or the expansion of existing businesses) in the first 11 months ( July-May) of FY22, which is 140% (or Rs247 billion) higher than the borrowing of Rs175 billion during the same period of the previous year.

In addition, the demand for credit to meet current business expenses (working capital) was recorded at Rs671 billion for the 11 months. It was nine times higher compared to only 75 billion rupees during the corresponding period of the previous year.

The data suggests that people have continued to acquire high car and real estate finance over the year despite dozens of measures taken by previous and current governments to reduce imports of luxury goods since September 2021.

Companies borrowed a huge amount of 1.44 trillion rupees in FY22 despite the central bank’s policy rate increasing by a cumulative 800 basis points since September 2021 to a 14-year high of 15 %.

Businesses continued to borrow heavily, although inflation hit a 13-year high of 21.3% in June 2022, while monthly average inflation exceeded 12% in FY22.

Inflation is expected to peak at around 23% in the coming months.

The central bank said the country has achieved 6% higher economic growth in the last two consecutive years (FY21 and FY22) thanks to stimulus packages (including industrial plans) provided by the government and the central bank. through fiscal and monetary policies. .

Stimulus plans have strengthened the purchasing power of businesses and households.

Growth, however, is expected to slow to 3-4% in the current fiscal year 2022-23 after the central bank raised its key rate to curb inflation, suggesting businesses could lose their appetite for credit. during the year.

The central bank said in its latest quarterly report (Q1-FY22) on the state of the Pakistani economy that the flow of credit to the private sector increased during Q1-FY22 compared to the net withdrawal during the same period of last year.

“Despite seasonal loan repayments in the sugar and rice processing sectors, the overall demand for working capital loans has increased, mainly due to rising input costs, the recovery of economic activity and restoring business confidence.”

“In addition, the SBP’s TERF (Temporary Economic Refinance Facility) scheme boosted investment lending, while consumer finance continued to accelerate with strong momentum from the automotive and fuel segments. dwelling.

Businesses have borrowed a total of Rs 436 billion through the TERF program to start new businesses and expand existing ones. The program was launched for a limited period of one year in March 2020 to help companies pursue their investment plans following the outbreak of the Covid-19 pandemic in the country in February 2020.

The increase in credit can be attributed to three main factors. First, industrial activity – primarily the large-scale manufacturing (LSM) sector gained further momentum in the first quarter of FY22. Second, rising input costs (particularly cotton and l edible oil) has led to an increase in demand for working capital loans. Finally, overall business confidence improved during the quarter.

Published in The Express Tribune, July 9e2022.

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