Private sector borrows fast to chase higher growth target

Before announcement of the expected hike in interest rate by the State Bank of Pakistan (SBP), the private sector geared up its borrowing from banks and changed the entire landscape within a couple of weeks by borrowing Rs172b during the period.

Bankers said it seemed that the private sector had been chasing the annual economic growth target faster than anticipated by the government and the SBP.

Sources in the banking industry said there was clear indication that interest rate would go higher since the real interest rate was still negative which convinced the private sector to borrow more before money became costlier.

The SBP reported that the borrowing by the private sector had increased by Rs172bn from Sept 3 to 17 against a net retirement of Rs133bn noted in the same period of last year. The stock of private sector borrowing was at Rs7.484 trillion on Sept 3 which rose to Rs7.656tr on Sept 17.

The central bank increased the interest rate by 25 basis points to 7.25 per cent on September 20 while it indicated that further hike was possible during the current financial year.

Bankers believed that the private sector had started borrowing more on expected further hike in the interest rate.

The SBP's Monetary Policy said that its stance was still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis, adding that it expected the monetary policy to remain accommodative in the near term, with a possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.

Bankers said the SBP feared higher inflation with increased supply of money as indicated from the latest data. The currency in circulation has gone up to Rs244.6bn between July 1 and Sept 17 against Rs79.5bn in the same period of last financial year, while during the entire financial year the currency in circulation was Rs268bn.

The higher borrowing by the private sector also indicated the estimated government target for economic growth. The central bank in its monetary policy said the growth in the current financial year was now expected towards the upper end of the forecast range of 4-5pc, despite "some greater uncertainty with respect to spillovers from the evolving situation in Afghanistan".

So far no major impact was noted due to change in Afghanistan except that the exports on official account were lower than previous year.

The central bank said the most high-frequency domestic demand indicators such as sale of automobiles, POL (petroleum, oil and lubricants) and cement and electricity generation continued to depict robust growth.

The SBP noted that this growth is mirrored in the strength of imports and tax collections. However, exporters claim that they still have large orders but the higher electricity rates, costly cotton in the country, very high rates of shipping and ever increasing petroleum prices are making it difficult to meet the orders. Exporters are the largest borrowers of banks' money.

The government is expected to gradually increase petroleum levy on petrol and other petroleum products to improve revenue collection as targeted under the 2021-22 federal budget and IMF programme.

The move would help widen a gap between compressed natural gas (CNG) and petrol prices and may contain import bill. The government had set a Rs610bn target of petroleum levy during the current fiscal year but could actually collect no more than Rs25bn in first two and half months of the first quarter, an official said.