On September 7 the rupee closed at 60.58 to a dollar showing a gain of four paisas in the first week of the month. Bankers said that foreign exchange inflows remained strong during the week adding that the central bank also bought dollars from the market.

They said the inflows seen so far this month were in line with the trend witnessed last month. Towards the end of last month a sudden increase in portfolio investment plus inflows of funds from some multilateral lending agencies raised Pakistan’s foreign exchange reserves to a historic high of $16 billion on August 30. The amount is enough to cover six months import bill.

Between August 31-September 6, portfolio investment alone attracted about $80 million. Resultantly the net outflow of funds from special convertible rupee accounts fell to $111 million on September 7 from $191 million on August 30. Foreign exchange dealers at local and foreign banks said these accounts would shortly witness sizable net inflows given the pace with which foreign investors and overseas Pakistanis have resumed investment in the stock market.

Bankers said that continual inflows of foreign exchange boosted rupee liquidity levels and kept the short-term interest rates from rising too fast. On September 7, however, banks borrowed about Rs5.5 billion from the State Bank through its discount window to maintain their cash reserves at the prescribed level. As a result the overnight call rate shot up to 9.9 per cent chasing closely the SBP discount rate of 10 per cent.

Several bankers said that unlike in the past years the demand for private sector credit is very low adding that major industries were following a wait-and-see policy before general elections due later this year.

“One of our corporate borrowers who normally borrows a billion rupee or so during the first quarter of the fiscal year has so far made no fresh borrowing,” revealed a large local bank.

Bankers, however, said they expected a pickup in private sector credit demand from mid-September adding that in many cases the borrowers required to refresh their credit lines before the end of the quarter. “Cotton financing has already started and I believe that sugar millers would also start borrowing from the next month,” said head of credit division of a Pakistani bank.

“So you’d see pretty reasonable disbursement towards the end of October.”

A source close to the Private Sector Credit Advisory Board said that the board would meet early next month to set a tentative credit target for the private sector borrowing during this fiscal year. He said the target might be set in the range of Rs350 billion to Rs375 billion. In the last fiscal year the private sector credit target was Rs390 billion but up to June 23, i.e. one week before the close of the year, the actual lending had totalled Rs291 billion.

One of the key reasons for a depressed demand of the private sector credit is that lending rates have reached at very high levels. The latest data released by the State Bank show that at the end of July this year weighted average lending rate stood at 11.31 per cent, 80 basis points above the July last year level of 10.51 per cent.

Bankers said after further tightening of the monetary policy from August 1 this year, the lending rate were bound to move further up.

Heads of a state-run and a privatised bank admitted that the increase in lending rates had resulted in lower offtake of the private sector credit adding that the banks were now developing new lending products to lure borrowers.

“You’d see an array of new product both by our own bank as well as by a couple of other banks in the areas of agriculture, SME and corporate lending,” said one of the two bankers.

The head of a credit division of a medium size local bank said his bank was expanding the list of first class borrowers with an aim to make it more inclusive “so that new businesses with good balance sheets can also get financing at cheaper rates.”

— Mohiuddin Aazim