Unfriendly economic conditions have had a significant impact on the private sector credit offtake in Pakistan, with bank loans falling by 80 percent during the first ten months of the 2022-2023 fiscal year.
The State Bank of Pakistan (SBP) has released statistics showing that private sector credit offtake has plunged to Rs258 billion compared to Rs1,314 billion in the same period last year.
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Industry experts attribute this significant decline to the deteriorating economic conditions in the country and the extremely high interest rate. The one year of the present coalition government led by Prime Minister Shehbaz Shari took unpopular decisions to guide the economy on the right track, but these decisions have resulted in counterproductive consequences, and the economy has continued to suffer.
Industrial activities have remained stagnant due to the high cost of utilities, non-availability of raw material due to import restrictions, and the massive surge in benchmark policy rates. On April 4, 2023, the central bank increased the benchmark policy rate by 100 basis points to 21 percent. This has resulted in a slowdown in economic activity, and private sector credit continued to moderate.
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The deceleration was mainly due to a significant decline in working capital loans to wholesale and retail trade services, as well as the textile sector in the wake of lower domestic cotton output and a slowdown in consumer finance. Furthermore, economic activities were stagnant due to restrictions imposed by the government on the import of raw material and capital goods.
Although the government lifted the ban on import of luxury and non-essential items in August 2022, the SBP kept certain restrictions on the import of goods. The restriction included the limit of opening the letter of credit (LCs). The banks have not had sufficient dollars to meet local demand, and this has also contributed to the decline in private sector credit offtake.
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The private sector credit offtake also fell due to a massive increase in inflation. The SBP admitted that despite the slowdown in the economy, inflation was rising, and persistent global and domestic supply shocks are raising costs. In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth.
In conclusion, the unfriendly economic conditions in Pakistan have led to a significant decline in private sector credit offtake, and businesses have shied away from taking new loans for productivity. The government needs to take swift action to address the challenges facing the economy and create an environment that is conducive to investment and growth. The SBP also needs to revisit its monetary policy and take measures to provide liquidity to the banking system to meet the credit needs of the private sector.
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