The decline in the economy is manifesting in the lending patterns to private sector businesses and consumers which is arguably prophesizing a subsequent decline in business outputs and consumption. As per numbers in the Pakistan Economic Survey 2018-19, total loans to private sector businesses has grown to Rs554.7 billion in Jul-Mar19 against Rs401.1 billion in Jul-Mar18 with the biggest credit expansion reflecting in mining and manufacturing sectors. While this may seem positive, the numbers are a forewarning.
For starters, end of month stock for April-19 (the economic survey quotes numbers till Mar-19) as per SBP economic data is already showing some cracks on a monthly basis. Though year on year, the stock has grown, not declined. The more troubling statistic in fact is the credit distribution by type of finance and the underlying causes of the credit expansion.
The increase in credit is primarily driven by working capital (up 70%) which is nearly 67 percent of the total loans. It used to be 53 percent this period last year. Trade financing share in total credit has also grown from 9 percent to 18 percent (credit up 102%). What has suffered? Fixed investment credit has fallen by 44 percent which are typically long term loans used in business expansions and growth. Their share in total credit has fallen from 37 percent to a mere 15 percent in the Jul-Mar19 period year on year.
The context here is important. Businesses are experiencing a liquidity crunch as fuel prices (oil, coal etc.) along with global raw material prices have increased, only exacerbated by the rupee depreciation—about 30 percent in the past year. In fact, the increase in overall credit is merely illustrating a growing problem—that manufacturing and exporting sectors now have to pay higher costs for the production of the same goods. Clearly, the increase in credit has not led to an increase in production.
As also pointed out by the SBP quarterly report: “This trend is largely due to the rising cost of imported inputs and higher energy prices on account of rupee depreciation and liquidity constraints owing to a higher level of unsold inventories (in POL, steel, autos, fertilizers, electronics and sugar sectors) along with circular debt in the energy sector.”
Though the economic survey does not reach to this conclusion and avoids opining on the implications of the credit numbers, it quotes the example of the automobile sector where the working capital rose largely “owing to higher cost of components and accessories due to exchange rate depreciation, imposition of regulatory duties as well as cash margin requirements on the import of completely- and semi-knocked down units”. Evidently, production of commercial vehicles as well as passenger cars is now witnessing negative growth if data reported by PAMA is any indication.
On consumer financing, credit has significantly contracted, of which the more notable sub segments are auto and home loans. Though the survey believes the decline comes due to government ban on non-filers from purchasing vehicles and properties, this reason may be secondary. Rising car prices coupled with the higher cost of borrowing (due to the ever increasing policy rate) is the primary reason for the decline in auto loans. Meanwhile, mortgage has never had any strong pull from the commercial banking sector to begin with. The decisive decline comes from increasing property prices together with reduced supply of housing.
The near doubling of policy rate at 12.25 percent up from 6.5 percent in May-18 will undoubtedly contract private credit. Industries will have to cut down production if they are unable to meet higher borrowing costs. This also does not bode well for new entrants particularly in the automobile sector as they get set to introduce new models marketing to consumers with reduce buying power and who may not be able to absorb the high cost of financing. Banks on the other hand, will be more inclined to invest in risk free government papers as fears of private sector NPLs loom forcing them to gradually retreat from the segment.
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