KARACHI: The private sector has stopped borrowing from banks and has instead started retiring the debt it accumulated in the first half of the current fiscal year.

The bizarre situation developed during the third quarter as the fast growth in credit off-take by the private sector during the first half of the fiscal year dropped, negating the government’s claim that the friendly economic environment had attracted the private sector to increase their participation.

According to the State Bank of Pakistan’s (SBP) report, the private sector credit (PSC) expanded by Rs352.9 billion in the first half of FY16, against the Rs222.3bn in the same period last year. The SBP explained that the expansion in PSC was broad-based as a large number of sectors, including textiles, fertiliser, retail trade, construction and electricity, availed higher credit in FY16.

The SBP’s latest report of almost 10 months (July-April) indicates that private-sector borrowing slipped to below Rs300 billion, coming closer to borrowing made during the same period last year. The SBP reported PSC off-take of 10 months as Rs296bn compared to Rs204bn in the corresponding period.

The myth that government policies have improved the economic environment for investors has proved to be wrong with the quick fall in the private sector credit off-take. The government hopes it would achieve an economic growth rate of 5pc against the projected target of 5.5pc for this fiscal year and the main thrust is on the China-Pakistan Economic Corridor and the construction industry.

Builders and contractors said on Thursday that recent political upheavals emerging out of the issue of Panama leaks has stated damaging property prices that could see slower growth over the next six months.

The biggest attraction for the private sector, according to the government and the State Bank’s reports, was the low interest rate. However, that too proved wrong as it failed to generate demand for credit. The expectations of economic managers that the private sector would benefit from cheaper money fell apart. Despite higher revenue generation compared to the last fiscal year, the government still depends largely on borrowed money from the banking system to meet fiscal deficits.

The government has so far borrowed Rs1.072 trillion from scheduled banks during the slightly less-than-10-month period, compared to the Rs1.280 trillion in the same period last year.

Fiscal authorities resorted to financing their deficit through borrowings from external sources and commercial banks. As a result, they were able to retire SBP’s debt of Rs346 billion during the 10 months. This shift in borrowing from SBP to commercial banks is aimed at meeting the IMF’s targets.

The State Bank, in its second quarterly report, said the developments in the credit market were encouraging.

“Higher expansion in PSC is attributable to the improved business environment (better security situation and improved energy management), lower cost of borrowing; and modest risk premium for banks,” said the SBP report, which no longer seems relative to the development in the remaining part of the second half of the current fiscal year.

Published in Dawn, May 6th, 2016