Until October 2017, private sector credit was only going to the textile sector (figuratively speaking). Two months onward, the story has improved after the last two months of calendar year 2017 saw a noticeable expansion of credit beyond textile. But even after the phenomenal rise in November and December 2017, private credit off-take in the first half of fiscal year 2018 is 21 percent lower over the same period last year.
According to central bank data, net loans to private sector business stood at Rs252 billion in 1HFY18, compared to Rs22 billion at the end of 4MFY18. About 52 percent of the 1H borrowings (or Rs132 billion) were obtained by textile sector. Other key borrowers included: commerce & trade, construction, real estate, electricity, water & gas, and business involved in manufacturing non-metallic mineral products.
Within textiles, the spinning and weaving segments continue to tap the LTFF scheme that was offered at rather attractive rates, whereas the value-added sector also took fresh loans on the back of the recent textile package.
Food sector loans that historically account for about a quarter of manufacturing sector loans have been witnessing a net retirement in the year to date even as edible oil, poultry and sugar manufacturers have been rolling out expansion or BMR plans eyeing growing consumerism in the country.
In the absence of detailed sector-wise data, one assumes the net retirement in food sector loans is due to the delay in sugar crushing season that has resulted in weaker demand for working capital loans. In fact, according to SBP’s 1Q State of Pakistan Economy report, sugar and fertilizer sectors made heavy retirements, whereas edible oil and ghee manufacturers are reported to have obtained additional working capital financing to stockpile palm oil inventories in anticipation of higher international market edible prices.
The retirements by sugar and fertilizer sectors only explain one part of the 21 percent year-on-year decline in loans to private sector business in 1HFY18. The other part is explained by one-off borrowing by the value-added textile sector last year; Rs143 billion in 1HFY17 as against Rs11 billion in 1HFY18.
Looking ahead, business and consumer sentiments have been improving in recent quarters. The record high in loans obtained by commerce and trade as well as consumer financing can be a decent proxy for that. Overall demand is also rising on the back of government infrastructure spending that has attracted investments in ancillary industries such as cement, transport and iron and steel.
The recently released monetary policy statement also read that private sector credit off-take is expected to remain strong in the remaining period of FY18. However, if the central bank’s own 1QFY18 wave of Bank Lending Survey (BLS) is any guide, it may not be the case. (See BR Research column ‘The credit goes to textile’ Dec 6, 2017). Remember also that January onwards, the growth in credit off-take usually slows because of a host of seasonal factors (mainly textile and commodity led factors); whereas fresh fixed investment plans may be kept at bay if political situation worsens. Plus, the SBP has already jumped the gun on the interest rates — surprising bankers, market participants and economic observers alike. The balance of opinion, therefore, does not lie in favour of a strong year for credit off-take.
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