The monetary policy statement issued post MPC meeting last week makes no reference to private sector credit activity. The post MPS briefing, however, claims that private sector credit growth is decelerating due to subdued demand for working capital loans. The statement is juxtaposed with an extraordinary illustration; however, offers no explanation as to what might be at play.

Zoom in on Figure 02 of the illustration. According to SBP, Fixed Investment (FI) loans recorded their sharpest month-on-month increase during December 2023, rising by net Rs85 billion in the last month alone. Although aggressive asset booking is common near annual closings, the month-on-month rise of 4.75 percent in fixed investment loans is also the highest in percentage terms.

Here it may be useful to emphasize how SBP defines this loan category. For the purposes of illustration, SBP has excluded long term concessionary financing facilities such as LTFF – made available to exporting industries, and TERF – offered during the 2020-21 pandemic to spur economic activity. Fixed investment loans, thus, are loans made available by banks directly to private sector firms on commercial pricing and terms, without any risk sharing mechanism with the central bank or government of Pakistan.

Long term loans by their very definition are primarily utilized for capital expenditures such as green- and brown field projects, plant expansions, BMR activity, infrastructure development under project finance, and mergers and acquisitions. Since long term credit is often riskier due to extended repayment periods (usually between three to up to 10 years), Pakistani commercial banks aren’t particularly popular for issuing long term loans willy-nilly. In fact, commercial banks’ unwillingness to extend LT credit for capex is precisely why the central bank has often stepped in with concessionary financing credit schemes such as TERF, offering credit on fixed pricing of as low as three percent for loans of up to ten year tenor.

So, what exactly happened during December 2022? SBP’s graph (Figure 02) is of course no mistake, and checks out when ran against monthly credit to private sector datasets published by the bank. Remember, LT credit extended on commercial terms remained stagnant at Rs 1.6 trillion between June 2019 – Feb 2022, as concessionary credit bonanza took over. Over the past 12 months, gross disbursements approximate at just Rs 250 billion, of which one-third took place during December 2022 alone.

What happened? Were some good folks from the private sector denied cheap TERF loans and instead waited for interest rate cycle to peak to draw out loans for the next five-ten years? More importantly, if commercial credit disbursement for capex has picked up when the scale of monetary tightening is possibly at its three-decade peak, does it not denote a complete failure of monetary policy transmission mechanism? ‘Austerity-shausterity’. If commercial credit data is to be believed, the private sector is clearly betting on economic growth, and this time not on the miserable crutches of concessionary and subsidized finance.

Although commercial banks are notorious for window dressing assets and deposits books on closings to outperform rivals, traditionally, these activities are concentrated in working capital, specifically through short term advances and pledge financing loans. Working capital finance didn’t exactly slowdown during December 2022 either, in fact rising by 9 percent month on month despite stagnation in import financing loans and a freeze on incremental disbursements of concessionary export financing trade loans. This is both intuitive and in line with historic trends, since short terms loans are often extended under already approved financing arrangements, and require less complex collateral documentation and risk review compared to fresh long term loans.

If window dressing has been at play, the central bank should take note, since it makes a mockery of SBP’s attempt to slowdown credit growth. If the growth is organic, then SBP may have to do a lot more to slowdown demand-side activity. Which explanation would SBP prefer?