The second indicator is the sector-wise share for each type of loan. The share in total outstanding loans, as per the above named sectors, in June'18, was 6.5, 31.3 (textile as share of manufacturing), 7.1 and 7.3 percent. In Sept'19, the corresponding shares were 5.8, 30.3, 3.3 and 7.9. Although shares of 3 out of 4 largely poorly documented sectors are small, a comparison of cycle i) and ii) suggests that construction/real estate is the most sensitive to interest rates, as its share halved in cycle ii. The shares in working capital loans of these 4 sectors were 10.4, 25.3, 6.5 and 11.4 percent in June'18. Corresponding shares fell in Sept'19 at 9.1, 21.8, 2.0 and 11, respectively. The sectoral shares of outstanding loans under fixed investment showed mixed trends. Textiles share went up from 20.5 in June '18 to 29.1 percent in Sept'19. WRT share went up marginally from 3.4 percent to 4.0 percent. Agriculture's share fell marginally from 5.6 to 4.9 and construction/real estate fell significantly from 10.8 to 6.4 percent in the corresponding period. Except textile and construction/real estate, the fixed investment as compared to working capital loans in other 2 sectors is less sensitive to interest rates. One cannot discount the possibility that in textile, the accumulation of interest costs may be faster, while the documentation drive in construction/real estate plus 50% increase in rupee value of remittances may have reduced the outstanding loan balances. One cannot reject the hypothesis that in a low interest rate environment, it is more profitable and easier for poor documented sectors to channel working capital loans to financial investments (fungibility), where returns are higher, quick and dirty.

The third and the last indicator is the average monthly growth rate of outstanding loans by the above sectors and overall during interest rate cycle i) and ii). During low interest rate cycle i) the monthly growth rate in outstanding loans was the highest for poor documented sectors of construction and real estate and WRT. It stood at 2.2 and 2.1 percent followed by 1.8 percent (textile) and 1.6 percent (agriculture). During cycle ii) the corresponding rates were -3.3, 1.0, 0.7 and 0.5 percent, again the fastest drop in the poor documented sectors. Corresponding growth rates for outstanding working capital loans and fixed investment loans in these 4 sectors constituted a mirror image of the above profile of aggregate outstanding loans.

The relationship between internally generated funds, investment (both fixed and financial) and interest rates also merits discussion. The small shares of outstanding loans of agriculture, construction/real estate and WRT sectors indicate that most of fixed investment and working capital requirements are met from internally generated funds. Again actual fixed investment figures are soft (specifically for poorly documented sectors) and estimated indirectly and on the basis of outdated surveys. In a poorly documented economy like Pakistan's tax evaded accumulated profits, hidden capital gains, undocumented/undervalued inheritances and wealth, formal and informal remittances constitute internally generated cash/savings sloshing around in search of expected and actual returns higher than the returns offered on bank deposits (which closely follow policy rate cycles). These savings are usually parked in financial investments mentioned above. In addition because of poor documentation, weak tax compliance, expected episodes of devaluation and expected increase in administrative prices, this unaccounted saving along with loans (specifically working capital of poorly documented sector) from banks also circulates in built property, automobile sector, speculative imports and hoarding of essential goods. Few examples how the finance 101 is in play by the internally generated funds and loans (under the garb of working capital loans) are as follows: The meteoric rise of stock market in last few weeks and appreciation of rupee against the US $ is one example how this domestic unaccounted savings, foreign savings and the possibility that government will implicitly adopt 'one step forward and two steps backward' in tax reforms is shaping the financial investments dynamics. With wholesale and retail commodity trade depressed, many traders are unhappy at high markup being charged on car loans. Casual empiricism indicates that in the 4th year of PML-N government, importers could smell pressure on exchange rate and indulged in speculative imports to push the C/A deficit to record levels. However, it will be unfair to ignore that internally generated funds and loans through banks from above sources also support the productive economy. Construction has strong forward linkages, but these linkages are also mostly lightly taxed except cement, iron and steel or have high import content, while the automobile sector has strong backward linkages (employment but again with high import content). WRT and agriculture has both backward and forward linkages.

In summary, the above stylistic data analysis supports the hypothesis that private sector investments (specifically working capital loans) in poorly documented sectors are more sensitive to changes in interest rates than better documented sectors (manufacturing) simply because of fungibility characteristics of loans. The tentative implications and dilemma facing the interest rate policy makers is as follows:-As the pressure by the gurus, media and opposition to initiate an early and speedier downward cycle of interest rate mounts in the coming months, what are the implications of succumbing to such recommendations? Ideally the speed and extent of downward cycle of interest rates should not be out of sync with the speed and extent of downward cycle of CPI. No doubt faster downward cycle of interest rates will jumpstart the GDP growth rate in the short/medium run and it will please the proponents of 'inclusive growth' per se but the policy issue is what will be the composition of growth and will it be sustained? It may be very similar to Dar's growth era. This time an over-valued rupee will be replaced by low interest rates. The presence of poor documented and under-taxed sectors will increase the risk of generating construction/real estate boom, consumer credit boom (including car and housing loans) along with reinforcing the ongoing stock market dizzy heights as the gap between expected rate of returns/inflation and policy rate widens. In second round of transmission it will worsen our trade balance via increasing imports, if exports continue to grow at a dismal rate.

Pursuing an aggressive downward interest rate cycle is a dilemma for policymakers in the adoption of an appropriate policy mix for sustained growth. In Pakistan, the mix consists of tight/easy monetary policy combined with neutral/easy fiscal policy. With low tax base and tax-to-GDP ratio plus a plethora of hidden and explicit subsidies throughout its history, either it has been neutral fiscal policy (meaning leash on expenditures/subsidies with status quo low tax base) or easy fiscal policy (meaning generous expenditures/subsidies combined with status quo low tax base e.g., in times of elections). Thus in current circumstances the policymakers have adopted a tight monetary policy stance with a prior tight fiscal policy. If ex-post facto fiscal policy turns out to be neutral, combined with politically motivated ex-post facto easy monetary policy, we will be back to boom and bust cycle characterized by short-lived spurts in GDP and distorted composition of growth. A sustainable growth path with manufacturing and exports as the backbone can only be achieved by equalizing risk adjusted after-tax rates of return across sectors prior to adopting easy monetary policy.