A record month-on-month rise of over a trillion rupees in gross banking advances; nearing nine percent over Sep-24, and highest in at least 25 years. A contraction in the banking sector deposits of nine hundred billion rupees over a month, or by three percent -the highest in 5 years (outside of year-ends). And – minus a crash in the global energy market - a monthly CPI reading that has most likely already bottomed out.
The past (read: 2023) is clearly a different country. After all, the economy must have come a long way from the prospect of looming default if the only question being litigated by opinion makers and commentators right now is whether the central bank should slash the policy rate by 500bps today or by mid-December before the calendar year closes. In less than a year, the definition of hawks has witnessed a semantic shift – from those advocating for more contraction to those cowed down into relenting that a cut can run up to 150-200bps. But with 3-month Kibor already at 14 percent, why blame the commentators? The interbank has already incorporated a rate cut of 350bps over the next two months. How material would it be whether it is staggered over six weeks or not?
Whether we like it or not, the monetary easing cycle is here. Those quick to dismiss the record rise in private sector credit over the last month as window dressing to avoid ADR tax should pause and consider the following.
The loss appetite of any commercial bank battling low ADR is restricted to the marginal tax liability. Strange as it sounds, the ADR liability is calculated on period-end balances, and not on the basis of period average outstanding. If the credit growth was purely due to ADR avoidance, banks would not go out of their way to dish out credit lavishly in the middle of October, eleven weeks before the tax date. Instead, they would minimize their losses and advance STAs in the last weeks of December, as is industry practice. In fact, rational bankers would at least wait until the December MPC meeting and wait for their cost of funds to be adjusted accordingly, before taking on accounting losses for window dressing purposes.
Even if banks are already lending at Kibor minus rates, a factor of the matter is private sector participants would only agree to borrow large amounts at Kibor minus – say 150bps - right now if they are certain that come rate reset in Jan 2025, the benchmark Kibor would be lower by that much. And with Kibor already 350 bps below the policy rate, that’s 500bps over the next three calendar months.
After all, one trillion rupees worth of credit is not injected overnight into a private sector that was previously dysfunctional for at least the last 22 months. Moreover, working capital once borrowed is not settled, at least not in nominal Pak Rupee terms. It would be even harder to fathom if this is borrowing towards fixed investment/expansion purposes. After all, the rest of Pakistan would love to meet the businesses that have taken such a strong and optimistic view on the near-term outlook.
Sooner or later, it would make its way through the economy by way of stimulating economic activity. And eventually, prices. The only force of nature that can tip the scales and restore the central bank’s spine to do the right thing is the Fund. And it might not complain, for as long as “real rates are held positive on a forward-looking basis”.