The long-awaited fall in government borrowing along with growth in bank deposits, resulted in healthy growth in credit to the private sector. According to State Bank of Pakistan's (SBP) annual report, despite a reduction in fiscal deficit in early FY14, the government borrowed Rs 622.1 billion from the SBP during July-October FY14. In fact, the commercial banks' reluctance to invest in government securities (they were expecting a hike in the policy rate), and the lack of external financing during this period, forced the government to rely on SBP funding.
This financing mix improved after the increase in policy rate in November 2013, which helped the government to substitute the SBP. In addition, the availability of external funding during the second half of the year reduced the pressure on the banking system.
The report says that the sharp improvement in external inflows not only pushed up the country's forex reserves, but also eased the government's reliance on domestic sources of funding, especially on the banking system.
At an aggregate level, broad money supply expanded by 12.5 percent during FY14, compared to 15.9 percent in FY13. It is encouraging to note that this deceleration was accompanied with a favourable change in the composition of M2 growth: the net foreign assets of the banking system saw an expansion of Rs 332.0 billion in FY14, against a net contraction of Rs 263.3 billion in FY13; while the increase of Rs 778.2 billion in net domestic assets (NDA) of the banking sector in FY14, was almost half the expansion seen in the previous year.
"Within NDA, the improvement was entirely a function of lower government borrowing from the banking sector and this along with healthy growth in bank deposits, improved the supply of loanable funds to the private sector," the report says. The demand for private sector credit increased mainly due to relatively better availability of electricity and gas at the beginning of the year following the settlement of circular debt, the improvement in business confidence and some sector specific developments. All these factors contributed to a healthy 11.4 percent growth in credit to the private sector, a level last seen in 2008, the report adds.
Moreover, sectoral distribution of credit indicates a recovery in business activity as a number of sectors including textile, food and beverages, telecommunication, energy, electrical appliance etc figured prominently in the credit expansion. Although, credit to the private sector recorded positive YoY growth in FY14, a comparison with regional economies indicates that Pakistan is lagging behind its peers as far as credit to GDP is concerned. Historical data shows that the credit to GDP is declining in Pakistan, which is a further point of concern.
Last but not least, the recovery in the consumer financing is spreading, as an increasing number of banks are positioning themselves to benefit from this segment of the economy, the report says and adds that being the leading indicators of underlying economic activity, the positive changes in monetary aggregates and its key components, bode well for the outlook of overall economic activity.
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