June 09, 2007	Saturday	Jamadi-ul-Awwal 23, 1428

RAWALPINDI, June 8: As construction boom is well underway in Pakistan, advances to construction sector remained strong at 24.6 per cent during the first nine months of the outgoing financial year as compared to little lower than 28.7 per cent during financial year 2005-06, says the Economic Survey 2006-07 released on Friday.

As construction cost mounts, more of this activity is expected to come in the formal sector thus fuelling demand for credit. At the same time the Karachi Stock Exchange (KSE) saw its first listing of a real estate development company in 2007 suggesting that the domestic construction industry is finally coming of age.

This was caused primarily by the increased financing needs of infrastructure related construction activities. Further, the rise in raw material prices, especially the international metal prices, have also led to increase in financing needs of construction sector, notes the Survey.

After registering an extraordinary growth of 70.5 per cent in July-March financial year 2004-05, the consumer loans have been exhibiting a deceleration; dropping to 31.6 per cent in July- March 2005-06 and 11.9 per cent in July-March 2006-07. While the July-March 2006-07 slowdown also incorporated some base effect; the slowdown in July-March 2006-07 was caused primarily by the increase in interest rates as well as more restrained lending by banks.

The deceleration in auto loans, in particular, was the largest contributor in total decline of private sector credit. The slowdown was attributed to the increase in interest rates; low demand for automobiles as a result of increase in prices of domestic cars and low interest of consumer in imported cars; high insurance charges that have increased the effective cost of automobile financing; and increased number of bad debts due to interest rates increases that resulted in relatively more cautious lending by the banks.

The Survey reveals that personal loans witnessed significant deceleration during July-March 2006-07. In addition to increased cost of financing, the mandatory use of Credit Information Bureau (CIB) data by banks is also cited as a major reason in the slowdown of personal loans. In addition, the SBP has given much emphasis on the need to ensure closed monitoring of personal loans so that these loans are not utilised for speculative activities.

According to the Survey, growth in Net Domestic Assets grew by 14.28 per cent during July-May 2006-07 as against 13.50 per cent increase during the corresponding period in the previous year. The higher growth in NDA was caused entirely by a sharp growth in credit to government sector (Rs185 billion). The rise in government borrowings more than offset the impact of a sharp slowdown in credit to non-government sector.

Following the significant improvement in country’s external account, the NFA of the banking system registered an expansion of Rs88.2 billion during July-May 2006-07. The increase in NFA looks particularly high especially when compared with Rs9.8 billion initial estimate in the Credit Plan for FY 07 and a sizable low expansion of Rs43.8 billion during the same period last year.

Major factors responsible for the current expansion in NFA include relatively high remittances inflows, influx of foreign exchange mainly through GDRs, a relatively high foreign investment (both FDI and Portfolio), foreign private loans and increase in loan disbursements from Asian Development Bank.

Within the banking system, so far, the growth in NFA stemmed entirely from scheduled banks’ NFA where most of the private sector foreign exchange flows were directed. The increase in SBP NFA, in contrast, during July-May 2006-07 were a little lower than in July-May 2005-06 mainly due to relatively lower government sector external inflows in the former period.