Pakistan''''s economy is in desperate search for a lubricant, as the latest data reveals that credit to private sector nearly zeroed in the first eleven months of fiscal year 2008-09 (it is actually in negative territory as per weekly data released by SBP), as the government borrowing crowded out private sector credit off-take in an attempt to straighten its books with the central bank.
Data released by the State Bank of Pakistan shows that private sector borrowed just Rs 2.8 billion between Jul-May FY09 - nearly nothing compared with Rs 391 billion borrowed in the same period last year. A closer look reveals that farming and forestry sector, on which the government quite heavily needs to rely on, actually paid back Rs 1.9 billion of its debt in 11MFY09, as against borrowings of Rs 8.4 billion in the year ago period.
One might question that since when debt repayment became such a bad omen - but when contemporary economies need a wheel, credit is their major driver. Meanwhile, coinciding with the negative growth in manufacturing output last year, the sector saw borrowings drop by nearly three-quarters to Rs 44 billion in 11MFY09.
One of the major hits there was the debt repayment of Rs 20.7 billion by the textile sector - the backbone of our exports - compared with Rs 81.8 billion of net borrowings in 11MFY08. This is partially explained by fewer export orders, thanks to global meltdown, rest is attributed to stringent banks'''' loaning conditions in an effort to clean their assets portfolio and also textile manufacturers'''' inability to generate enough cash flows to meet rising credit cost.
Bucking the general trend, however, were borrowers involved in power, gas, and water supply businesses, who took Rs 39.7 billion worth of fresh loans in 11MFY09 - though still down nearly 36 percent from about Rs 62 billion in the corresponding period last year.
This, thankfully, at least comes in line with the government''''s efforts to produce more electricity - but one should be mindful that the figures also partly include loans taken for generators and UPS''''s etc. However, going forward, once the new projects come online to meet demand supply gap, this trend would not continue.
During the period, consumer financing tanked sharply as well, as higher interest rate regime deterred clean consumers to take new loans, while recessionary fear of low future earnings compelled bankers to virtual halt on fresh disbursement, if any.
Hence, consumers paid back Rs 61.2 billion in 11MFY09 as against net debt of Rs 14 billion in the year ago period. Part of this drop, includes the repayments of Rs 24 billion taken in auto financing, Rs 8 in credit cards and the mortgage repayment of Rs 4.3 billion.
Meanwhile, the government continued to gobble up credit from scheduled banks - a mammoth Rs 336 billion in 11MFY09 as against the repayment of Rs 130 billion in the corresponding period a year ago. This mainly stemmed from its desire to cut on its central bank debt in order to meet IMF''''s conditionalities.
This overall grim situation is evident from the negative manufacturing growth, which in turn induced decline in services sector growth momentum. The dearth of investment owing to bleak security situation and high interest rate regime with inflation gradually tapering down, now calls for an expansionary monetary policy.
Moreover, the halt in the privatisation process and low FDIs owing to global meltdown also compels the fiscal side to run a stimulus package. Although, these policies are not in line with the stringent IMF conditions, it seems no other solution is on cards to give wings to the economy.
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