Karachi, September 20, 2023 – Pakistan’s private sector has exhibited a distinct preference for debt retirement over taking on new bank loans for business activities.
According to the State Bank of Pakistan (SBP), the private sector retired a substantial sum of Rs 283 billion during the current fiscal year to date, from July 1 to September 8. This stands in contrast to the retirement of Rs 85 billion in the corresponding period last year.
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The reluctance of the private sector to seek new financing can be attributed to several factors, chief among them being the record high interest rates prevailing in the country. Many businesses have opted to curtail or cease their economic activities and instead invest their funds in the banking system to secure better returns.
The SBP itself has acknowledged the challenging economic and financial conditions, particularly during the first half of calendar year 2023. Responding to persistent high inflation, the central bank raised the policy rate by a significant 600 basis points to 22.0 percent.
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In the face of these economic headwinds, the private sector in Pakistan has demonstrated a significant surge in bank deposits, which have increased by an impressive 21 percent. This surge reflects a growing inclination toward secure investments amid ongoing economic uncertainties.
By the end of August 2023, the total deposits within the banking system reached Rs 5.7 trillion, compared to Rs 4.71 trillion in the same period a year ago.
Business leaders have expressed skepticism about any near-term improvement in economic conditions, which has led to their cautious approach towards taking on additional debt.
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The Asian Development Bank (ADB) also highlighted similar challenges in its recent report. It noted that inflation is expected to ease in FY2024 due to base-year effects, normalization of food supply, and moderated inflation expectations. Furthermore, the central bank is likely to gradually reduce its policy rate from the high of 22 percent set in July 2023 to address inflation and stabilize the economy.
However, significant inflationary pressures persist, driven in part by sharp increases in petroleum, electricity, and gas tariffs. As import and exchange rate controls are relaxed, the Pakistani Rupee may further weaken, potentially increasing the cost of imported goods and adding to the economic challenges faced by businesses in the country.
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In light of these economic dynamics, the private sector’s preference for debt retirement and secure investments appears to be a calculated response to the prevailing economic uncertainties and high interest rates.
