If yesterday’s press conference of SBP governor Dr Reza Baqir is any indication, all eyes are on controlling inflation through monetary policy. But some eyes perhaps need to be lent to investment growth as well. Surely, if Pakistan is heading in the direction that the Governor terms “prosperous”, it should follow that we would see steady and robust inflow of investments in different productive sectors of the economy. But monetary policy tightening and rising trend of interest rates tends to hamper investment which in turn limits capital formation, business activity, expansion and growth.
Dr Baqir believes that market sentiments may be even more important than the cost of borrowing for investors and the broader economic reforms that this government is working on is already building international confidence in the economy. Let’s take his word for it. The question is: will Pakistani businesses invest in expansions and technological advancement when they are grappling with their more current concerns of keeping themselves afloat?
The private sector credit statistics are showing significant cracks. While overall borrowing of the private sector from banks has gone up, the share has shifted to working capital and trade financing needs. With the depreciating rupee and mounting fuel costs, the resultant cost of inputs for manufacturers has spiked. Liquidity has come under pressure causing the private sector to increase their borrowing from financial institutions.
According to the Economy Survey, in the July-Mar 2019 period, the lending for the purpose of working capital is nearly 70 percent of all private sector loans (2018: 53%) ,18 percent of it is in trade financing (2018: 8%), leaving merely 15 percent for fixed investment credit. This used to be a solid 37 percent in Jul-Mar 2018. The decline in fixed investment credit in total is significant as the measure indicates growth in future production (Read “No credit to credit expansion”, June 11, 2019).
The former SBP governor Tariq Bajwa had informed earlier that despite monetary policy tightening, the mark-up rates on export finance facility (EFF) and long term financing facility (LTFF) are at their 10-year lows thereby incentivizing export oriented sectors. Loans under these facilities have grown, though very slowly while exports growth can be seen marginally in volumes, if not value. However, the slowdown is evident in financing to SMEs—since Dec-18, loans to SMEs have dropped 7 percent. It also does not seem that new borrowers are being added to the total SME portfolio.
It is also clear that businesses are not spending on BMRs or planning new expansions at this moment, save for those that are already underway (such as cement, steel etc.) and who now have to pay a much heftier cost of financing, one they did not bargain for.
The new governor wants to address uncertainty in the market and has expressed that to be a major goal. What remains to be seen then is how businesses would react once this elusive certainty is achieved, high costs of doing business and borrowing notwithstanding.