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KARACHI, Nov 22: The private sector borrowing from banks shot up to Rs60.8 billion in less than four months to October 25, 2003, confirming that a filter-down impact of the economic recovery is in sight but fuelling concern of inflation going up in its wake after a lag of time.
Senior bankers say Rs45 billion credit disbursement took place within four weeks ending on October 25 as higher exports/imports and bullish cotton prices increased the demand for the private sector credit volume-wise.
All banks combined disbursed Rs60.8 billion credit to the private sector in less than four months of this fiscal year — between July 1 and October 25 — against the full-year target of Rs85 billion. Of this, the commercial banks disbursed Rs59.4 billion net credit and the specialized banks Rs1.4 billion, according to the latest State Bank statistics available on its website.
“The economic recovery made in past few years is now showing its filter-down impact on the real sector in terms of higher production and increased demand,” said a senior central banker when Dawn asked him to explain how he viewed the highest-ever growth in the private sector credit flow in July-October.
At Rs60.8 billion, the private sector credit offtake is an all-time high. In Pakistan, banks normally see credit retirement from the private sector in July-September, and credit demand starts picking up only in October. In the last fiscal year, credit disbursement between July and October was almost zero despite the fact that full-year disbursement saw a record high growth of Rs167 billion. The private sector credit had started picking up after a 1.5 percentage point cut in the SBP discount rate on November 16, 2002, which was followed by massive cuts in treasury bills rates, forcing the banks to lower their own lending rates.
“The huge build-up of Rs60.8 billion in the private sector credit should be seen in the same light,” insists Majyd Aziz, a former chairman of SITE Association of Industry, attributing it to the falling interest rates. “People are taking advantage of low lending rates,” he told Dawn. “There are both encouraging and disturbing factors,” he said, citing reasons for a record high growth in the private sector credit. He shared the view that the private sector credit was up due to increased economic activity, which is a positive factor. “But the disturbing factors are also there,” Mr Aziz said, pointing to delay in release of sales tax refunds and higher cotton prices, for example. Economist S. Akbar Zaidi also shares the view that one of the reasons for the private sector borrowing shooting up to a record high is a pickup in economic activity.
He says that higher exports/ imports, the textile sector’s upgrading and modernizing activities and an obvious rise in consumer financing seem to have fuelled private sector credit demand. Mr Zaidi says that another reason for a dramatic increase is that “some clever businessmen” are borrowing low-cost money from the banks to invest the same in the stock market and elsewhere. Hence the forming and bursting of stock prices bubble in the past few months.
INFLATIONARY IMPACT: But a key question is — will an all time high increase in the private sector credit offtake between July- October fuel inflation?
“Inflationary concern arises when the private sector credit grows but production remains static. I don’t think that is the case right now,” said a central banker. He said in absence of sector -wise break-up of the Rs60.8 billion credit disbursement, it is too difficult to say whether it would have some inflationary impact — and if so to what extent. “But indications are that production base is expanding and of late there is an increase is demand for goods as well,” he said, making it a point that this being the case the unusual growth in the private sector credit was yet another sign of economic recovery.
He pointed out that industrial production was up 11.7 per cent in July-September 2003, adding that an increase in demand for goods was also in sight pointing to unusual money withdrawals from banks during this Ramazan.
But it is obvious that an unusual increase in the private sector credit offtake may become inflationary after a time-lag because in some sectors, like automobiles, the industry’s capacity utilization has exhausted.
People are borrowing money to buy cars on lease and car makers are not able to make deliveries for months even though they are utilizing full production capacity. “Will the money available in the system not become cheaper and will it not push up inflation,” questions head of treasury of a local bank.
Economist Akbar Zaidi does not rule out the possibility of this kind of “high-level inflation” hitting Pakistan’s economy. But he says: “Its impact on consumer inflation will not be significant.” He says the government should instead, take advantage of low interest rate and low inflation to retire domestic debt even if it requires printing of money.
Inflation measured by the consumer price index rose 2.2 per cent in four months to October 2003 on year-on-year basis against a target of four per cent set for this fiscal year. But in October alone, consumer inflation was up by 3.5 per cent.
The International Monetary Fund warns in its latest country report on Pakistan that the inflation developments need to be monitored carefully even though there is no evidence of immediate pressures. The IMF says that risk of higher inflation in Pakistan is low, given weak import prices and favourable prospects of agriculture.
But it warns that the large excess liquidity in the banking system and “the continued strong growth in the private sector credit” are matters of concern.
INTEREST RATE ARBITRAGE: Businessmen admit that some of them have been borrowing low-cost money from banks to invest in the booming stock market, citing the same as yet another reason for unusually large credit offtake.
But Karachi Stock Exchange former chief Arif Habib says he has not noticed such a trend of late. “Maybe before September this year when the market was very bullish this should have had happened, but in October, this was not evident as a trend,” Mr Habib told Dawn. He attributes unusual private sector credit offtake to a number of factors, including higher cotton prices, increased use of pesticides in cotton fields due to pest attack, larger exports, an increase in imports particularly in imports of machinery and above all low interest rates.
Banks’ interest rates are at historic lows. Prime borrowers are getting advances at a low rate of 4-6 per cent and even weighted average lending rate is just seven per cent.
Mr Habib and Mr Aziz agreed with Dawn that a fall in remittances from overseas Pakistanis should also have lowered businessmen’s dependence on internal fund management and increased their bank borrowing.
In four months to October 2003, workers’ remittances from the US and the UAE, two major centres of these remittances, fell 28.3 percent to $569.5m from $794m in a year-ago period.
