Banking loans extended to the private sector in Pakistan have experienced a significant decline of 94% during the first 10 and a half months of the current fiscal year, as per the latest data released by the State Bank of Pakistan (SBP).
The private sector obtained a mere Rs75.40 billion in banking loans from July 1, 2022, to May 12, 2023, in comparison to Rs1,345 billion during the same period last year. Experts attribute this sharp decrease to high interest rates and uncertain economic conditions, which have dissuaded businesses from seeking new loans.
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High Interest Rates and Uncertain Economy Restrict Borrowing:
The private sector’s borrowing capacity has been severely hampered by the prevailing high interest rate scenario and an atmosphere of economic uncertainty. The benchmark interest rate has surged to a record level of 21%, rendering the private sector unable to secure fresh loans for sustaining their industries. The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has raised concerns, declaring that a 21% interest rate would be detrimental to the industry. FPCCI President Irfan Iqbal Sheikh noted that commercial banks now demand interest rates of around 23.5% to 24%, dissuading lending to the private sector.
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Monetary Policy and Regulatory Concerns:
Sheikh further questioned the efficacy of the country’s monetary policy, pointing out that the interest rate has been raised by an alarming 11.25% within a short span of 14 months. Despite these increases, inflation has not been curtailed effectively, raising concerns about governance and regulatory failures. These concerns prompt calls for a course correction by the government to address the situation.
Government Securities Attracting Commercial Banks:
Another factor contributing to the decline in private sector lending is the aggressive investment by commercial banks in government securities. In the face of challenging economic conditions, banks are more inclined to invest in risk-free government papers rather than extending loans to the private sector. This trend has limited the availability of funds for private businesses seeking financial support.
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Government Borrowing on the Rise:
Contrary to the decline in private sector lending, the government has experienced a substantial increase in borrowing from commercial banks. The government’s borrowing from commercial banks during the review period escalated to Rs3 trillion, marking a 108% increase compared to Rs1.44 trillion during the same period in the previous fiscal year.
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The decline of 94% in banking loans to the private sector during the first 10 and a half months of the current fiscal year reflects the challenges posed by high interest rates and uncertain economic conditions. With the private sector finding it difficult to obtain loans at affordable rates, experts and industry bodies are urging the government to reconsider monetary policies and address regulatory concerns. As commercial banks focus more on government securities, private businesses face a scarcity of lending opportunities. The government’s increased borrowing highlights the need for a comprehensive approach to balance the needs of both the public and private sectors.