Karachi, August 23, 2023 – Pakistan’s private sector has begun retiring bank loans in response to the challenging economic conditions facing the country.
According to the latest data from the State Bank of Pakistan (SBP), credit to the private sector is in a dismal state. Between July 1 and August 11, 2023, businesses retired approximately Rs 189 billion in loans, a significant increase compared to the Rs 99.46 billion borrowed during the same period last year.
Analysts attribute these developments to the adverse economic conditions that have hindered business activities. The high-interest rates have discouraged private sector entities from taking on new loans for expanding or establishing new businesses.
A pivotal moment in this credit decline was the SBP’s decision to raise the benchmark interest rate to an unprecedented 22 percent on June 26, 2023. This move deterred businesses from seeking costly loans. Furthermore, increases in refinancing rates have further diminished the willingness of businesses to seek financial assistance.
The consequences of the economic slowdown extend beyond the private sector’s loan repayment challenges, affecting the large-scale manufacturing (LSM) sector as well. According to the latest data from the Pakistan Bureau of Statistics (PBS), LSM output plummeted by 15 percent year-on-year in June 2023.
During the fiscal year 2022-23, LSM output reached 114.8, a significant drop from the 128.0 recorded in the previous fiscal year, marking a 10.3 percent decline.
Analysts at Arif Habib Limited attribute this decline to various factors, including policy measures taken by monetary and fiscal authorities to curb aggregate demand and the rising cost of doing business.
The significant reduction in loan portfolios is particularly evident in conventional banking branches. In the period between July 1 and August 11, 2023, the private sector retired Rs 139.32 billion, compared to Rs 247 billion borrowed during the same period the previous year.
Islamic banks also experienced loan repayments from businesses, with Rs 23.37 billion repaid during the review period, slightly surpassing the Rs 23.21 billion in new loans issued. Meanwhile, the loan retirement to Islamic banking branches of conventional banks was Rs 26.26 billion, compared to a retirement of Rs 171 billion.
The credit extended to the private sector dwindled to Rs 211.36 billion during the fiscal year 2022-23, representing a significant decline from the Rs 1.61 trillion recorded in the preceding fiscal year. These economic challenges continue to pose a formidable obstacle to Pakistan’s private sector, with ongoing concerns about the country’s economic stability.