KARACHI: There has been hardly any improvement in bank borrowing for investment despite a 200 basis-point cut in the policy rate, says the State Bank of Pakistan. SBP issued its second quarterly report on the performance of the economy as of end December 2011, on Tuesday.
Loans to Private Sector: The report says that after reaching a recent peak in February 2011, YoY growth in private sector loans has been continuously declining. It dropped to 2.8 percent in December 2011 from 7.5 percent in December 2010 (Figure 3.8).
This deceleration is broad-based and visible in all three categories of advances, ie, working capital, fixed investment and trade financing. Having said this, the composition of advances is shifting from fixed investment loans towards working capital. During the last three years, most of industrial credit demand has been for working capital loans.
The hike in raw material prices in global and domestic markets has raised the demand for short-term financing in FY11. In addition, liquidity shortages in POL and energy generation sector have also driven demand for working capital loans.
In contrast, says SBP, industries have reduced their demand for fixed investment loans; only 15 industrial sub-sectors availed fixed investment loans during H1-FY12 compared to 42 in H1-FY09 (Table 3.3.a & b). This situation reflects a significant slowdown of investment activities in the economy.
A number of factors explain this slowdown. For instance, structural issues (poor law and order situation and energy shortages) hampered overall industrial activity, resultantly reducing fresh demand for fixed investment loans.
Simultaneously, long-term projects in fertiliser, cement and telecom sectors have been completed and these sectors are now retiring loans. Further, a recent marked retirement under trade financing, coupled with a deceleration in working capital loans, account for the lower credit off-take in H1-FY12 (Table 3.4).
Deceleration in working capital loans is attributed to low demand for seasonal financing: fresh disbursements under rice, cotton and sugar sector remained low relative to last year. The slowdown in seasonal working capital loans for the textile sector was attributed to lower raw material prices and reduced global demand. It may be further noted that this slowdown in credit demand was visible in all important segments of textile sector (Figure 3.9).
Like textile, says SBP, loans to the sugar sector did not accelerate at the pace shown in the last two years (Figure 3.10). In fact, sugar mills could not off-load their inventories before the start of the crushing season, due to lower domestic price of sugar. This situation constricted sugar mills' ability to borrow from the banking system. Resultantly, the government intervened in the market and purchased 378,000 tons of sugar through TCP, to alleviate the problems faced by sugar mills. This intervention is expected to not only stabilise the market price but also help sugar mills clear their dues to farmers and to banks.
In addition, demand for working capital loans also came from other sectors including agriculture, refineries, fertiliser, basic metal, electricity equipments, retail trade and power generation. These sectors saw an expansion of Rs 66.0 billion during the first half of the year compared to Rs 26.5 billion in the same period last year. Most of the demand came from the cash-strapped power generation sector, which alone received Rs 35.4 billion in H1-FY12, which is almost twice that of the Rs 17.4 billion availed by the sector in the same period last year.
Meanwhile, says the report, the retirement of trade financing came mainly from importers, whereas EFS loans also decelerated sharply during H1-FY12. Within import financing, the retirement was concentrated mainly in foreign currency loans as the depreciation of the local currency during Q2-FY12 increased the cost of borrowing (in foreign currency) for traders.
Accordingly, traders retired Rs 28.9 billion of FCY loans during H1-FY12 compared to a net borrowing of Rs 20.8 billion in H1-FY11. On the other hand, the deceleration in EFS loans is largely due to a slowdown in textile exports in H1-FY12 (Figure 3.11).
Finally, consumer financing showed some signs of improvement during H1-FY12. Loan disbursements under consumer financing reached Rs 75.8 billion in H1- FY12 compared to Rs 64.6 billion last year. Details indicate that auto financing accounted for 45.0 percent of consumer loans disbursed during the period, the report added.
The Report said that while demand for private sector credit was understandably low, significant government borrowing from commercial banks also ate into the supply of loan-able funds for the private sector. H1-FY12 data indicates that government borrowing for budgetary support more than doubled, compared to the same period last year, it said, adding that although the bulk of this borrowing (Rs 391.0 billion) was needed to partially settle the inter-agency receivables of PSEs in the energy sector, and the payment of subsidies to procurement agencies (popularly known as circular debt), direct borrowing for deficit financing was Rs 365.0 billion, which was higher than last year's borrowing of Rs 308.5 billion.
It said that the greater concern is the composition of government borrowing, which has tilted towards inflationary financing. Q2-FY12 data indicates that the government was unable to meet its self-imposed quarterly limit of zero net budgetary borrowing from SBP, the Report said and added that high frequency data shows that government borrowing from SBP picked up from November onwards, and reached Rs 219.2 billion during Q2-FY12.
'This dependence on SBP financing was because of the difficulties encountered in rolling over maturing T-bills in the month of December 2011 - a risk highlighted in SBP's Monetary Policy Statements and Annual and Quarterly Reports,' it added.
It said that the data for consolidated fiscal operations indicates a deficit of 2.5 percent of GDP for H1-FY12. 'This deficit was slightly lower compared to the first half of FY11. The good news is that this came primarily from the revenue side; FBR tax collections reached Rs 840.1 billion during H1-FY12, showing a YoY growth of 27.1 percent,' it said, and added that moreover, SBP profits of Rs 104.0 billion contributed significantly to non-tax revenues.
Nevertheless, it is important to note that financing this contained fiscal deficit in H1-FY12 was challenging as compared to H1-FY11, it said, adding that, the burden of financing fell squarely on domestic sources since the expected external inflows did not materialise. Specifically, uncertainty about inflows from the Coalition Support Fund (CSF) and the Eurobond issuances still prevails, the report added.
The Report said the slowdown in foreign exchange inflows has also raised concerns about country's balance of payments (BoP). Specifically, Q2-FY12 data shows that the overall external account deficit has increased to US $1.0 billion compared to US $0.8 billion in the first quarter of the year; this takes the H1-FY12 external deficit to US $1.8 billion, it said, adding that the composition of the BoP reveals that the current account deficit has widened to US $2.2 billion, against an almost nil balance during H1-FY11.
The Report pointed out that within the current account, a positive was the growth in workers' remittances, which reached US $6.3 billion during the first half of the year. Despite these weaknesses, the size of the current account deficit should not be a major source of concern, given Pakistan's history, it said, adding that the real challenge is financing the current account deficit, as both debt and non-debt inflows have declined.
'Quarterly numbers indicate that financial/capital accounts posted a deficit of US $0.4 billion during Q2-FY12, which implies that the overall external deficit had to be financed by drawing down foreign exchange reserves, the report said, adding that hence, SBP's foreign exchange reserves saw a reduction of US $1.9 billion during H1-FY12 to US $12.9 billion. This decline in reserves was accompanied by a depreciating Pak Rupee, which lost 4.4 percent of its value during the first half of the year, it added.
=========================================================================
Table 3.3 a: Number of Private Industrial Sub Sectors Availing
Bank 's Loans (July-December)
=========================================================================
Table 3.3 a:
=========================================================================
Loan Expansion Loan Retirement
-------------------------------------------------------------------------
Working Fixed Trade Working Fixed Trade
Capital Investment Financing Capital Investment Financing
=========================================================================
FY09 33 42 11 24 7 15
FY10 23 19 16 19 15 10
FY11 36 17 22 15 19 5
FY12 35 15 14 18 20 10
=========================================================================
*All industries recording the credit flow of Rs 0.5 million or more in
July-December period are included
=========================================================================
Table 3.3 b: Expansion and Retirements of Loans taken by
Private Sector (July-December)
=========================================================================
billion Rupees
=========================================================================
Loan Expansion Loan Retirement
-------------------------------------------------------------------------
Working Fixed Trade Working Fixed Trade
Capital Investment Financing Capital Investment Financing
=========================================================================
FY09 126.5 122.0 15.9 -55.0 -7.9 -22.4
FY10 91.5 70.5 25.4 -41.6 -23.4 -10.5
FY11 164.3 39.7 59.0 -42.1 -29.0 -8.2
FY12 147.8 22.2 18.6 -65.5 -35.2 -20.9
=========================================================================
--- All industries recording the credit flow of Rs 0.5 million or more in July-December period are included
Source: State Bank of Pakistan.
=======================================================================
Table 3.4: Loans to Private Sector Businesses
=======================================================================
billion Rupees
=======================================================================
Jul-Sep Oct-Dec Jul-Dec
FY11 FY12 FY11 FY12 FY11 FY12
=======================================================================
Business Sector Advance -30.4 -95.3 220.6 181.3 190.2 86.1
Working Capital -32.7 -46.2 164.0 145.7 131.3 99.5
Seasonal Financing -35.0 -71.0 108.0 70.0 73.0 1.0
Rice -4.5 -10.7 26.4 22.8 21.9 12.1
Sugar -27.4 -35.4 11.5 -4.8 -15.9 -40.2
Cotton -2.7 -24.7 69.6 52.1 67.0 27.3
Fixed Investment -4.8 -22.4 12.9 14.0 8.1 -8.5
Trade Financing 7.1 -26.8 43.7 21.7 50.8 -5.1
Consumer Financing -8.8 -4.7 -8.6 -3.2 -17.4 -7.9
=======================================================================
Source: State Bank of Pakistan
Comments
Comments are closed.