Credit to private sector shoots up: Rs120.7bn disbursed
By Mohiuddin Aazim
KARACHI, Dec 11: Net bank borrowing by the private sector has reached Rs120.7 billion in less than five months against the full fiscal year target of Rs85
billion.
According to the latest figures released by the State Bank net private sector credit shot up to Rs120.7 billion between July 1 and November 22 2003.
Senior bankers attribute this to record high cotton prices and higher lending by banks in non-conventional areas. “Private sector credit has shot up primarily due to high cotton prices and higher consumer and agricultural lending by banks,” says National Bank President Syed Ali Raza. Mr Raza says that an estimated one third increase in the private sector borrowing has taken place due to record high cotton prices.
Cotton prices shot up 50 per cent during this season on news of smaller than estimated crop and in line with higher world prices.
Mr Raza says that liberal consumer and agricultural lending by banks has also pushed up overall private sector credit offtake and, in this regard, he cites examples of his own bank.
“National Bank alone made roughly Rs6-7 billion consumer loans and Rs2-3 billion agricultural loans.”
ECONOMIC RECOVERY: Mr Raza says that increased private sector credit offtake is an indication that the economy has been on the recovery path. “This indicates that the macroeconomic stability is now paying off,” he remarked. He said higher consumer spending is a sure way of boosting economy—making an obvious reference to the fact that liberal consumer financing by banks shows a build up in consumer spending.
But several economists have been on record saying that this is a false assumption. They say that liberal financing by banks for boosting consumer spending would not pay off in the medium to long term — and that sustained economic progress require a policy shift.
They say that a mere increase in private sector credit offtake may not necessarily indicate that economic recovery is in sight.
Says a known economist Dr. Shahida Wizarat: “An in-depth study is needed to see which components of private sector credit are showing increase. If agricultural lending has increased that is good for the economy.”
Dr Wizarat, who is a research professor at Applied Economic Research Centre, says that an increase in agricultural sector activity does translate into better performance of the corporate sector. “So the real economy does benefit when the agricultural sector is active.”
But she says that if the private sector credit is up primarily due to increased consumer financing “this may result in imported inflation,” because consumer loans are generally being used for purchase of imported goods. “This would not create jobs at home nor would it raise domestic output.”
INFLATION UP: Fear expressed by economists and shared by the IMF that unusual growth in private sector credit might increase inflation seems to be real. Year-on-year consumer inflation rose 4.2 per cent in the month of November alone and 2.62 per cent in July-November 2003 against full fiscal year target of 4 percent set for July/June 2003/04.
MONETARY POLICY: Unusual growth in the private sector credit offtake and resultant increase in inflation clears the way for revision of the State Bank monetary policy stance. Economists believe that the SBP would tighten its monetary policy in the second half of this fiscal year.
“The writing on the wall is that they (SBP) will have to tighten the monetary policy,” said renowned economist Dr. Shahid Hasan Siddiqui while talking to Dawn.
The central bank has been following a loose monetary policy stance since November last year.
It is due to issue its monetary policy statement for January -June 2004 early next month.
