KARACHI, May 17: The private sector’s borrowing from banks crossed Rs363 billion in 10 months of this fiscal year, beating the full year revised target of Rs350 billion. In July-April 2004-05, the private sector borrowed Rs363.1 billion from banks and development finance institutions (DFIs). In the same period last fiscal year, the private sector borrowing stood at Rs264.8 billion. The Rs363.1 billion borrowing in 10 months of this fiscal year has exceeded the full year revised target of Rs350 billion -— and it has led to a higher than projected inflation.

Inflation during July-March 2004-05 rose at an average annual rate of 9.06 per cent higher than the original target of five per cent. A huge growth in private sector credit in 10 months to April has also greased the wheels of Pakistan’s economy which is poised to grow eight per cent this fiscal year against the initial target of 6.6 per cent.

Prime Minister Shaukat Aziz told a government planning meeting on Tuesday that the economy should grow 8.3 per cent during this fiscal year as growth in agriculture, large scale manufacturing and services sector would exceed targets.

The private sector borrowing had reached an all-time high of Rs325 billion in the last fiscal year chiefly because of an impressive growth of 6.4 per cent in real GDP and this year it looks set to reach Rs375 billion. Thus the volume of bank credit to the private sector will be Rs700 billion in just two years, exceeding combined private sector borrowings in almost a decade. What has enabled banks to increase their private sector lending so fast is that they are awash with surplus money created in the wake of a dramatic surge in remittances from expatriate Pakistanis.

In the last fiscal year, overseas Pakistanis had sent home $3.8 billion and this year too they are set to send back around $4 billion. So, the volume of home remittances in just two fiscal years is going to reach $7.8 billon, exceeding remittances of the past several years. Remittances picked up after the terrorist attacks on the US on September 11, 2001.

In addition to larger inflows of home remittances what else has filled in banks coffers is the growing size of the economy which makes it possible for the banks to accelerate deposits mobilization. Besides, the financial sector reforms introduced in the country in the middle 1990s have made the banking sector more efficient, enabling them to slow down growth of bad loans and develop better expertise and infrastructure to lend more to the private sector.

But as real negative lending rates in the last fiscal year and also in the current fiscal year paved the way for commodities hoarding and a delayed government response allowed it to thrive, it led to higher inflation. Also, as most industries are operating at or near full capacity and some are operating above their full capacity; higher intake of the private sector credit is pushing up inflation.

Sensing this, the central bank has recently made its stance on monetary policy quite tougher compared to what it remained in three quarters of the current fiscal year. On April 11, it raised its discount rate by one-and-a-half percentage points to nine per cent and also allowed almost equally large increases in the cut-off yield on treasury bills to reinforce the signal that the time to tighten interest rates in a big way had come. Earlier between July 2004 and March 2005, it continued to tighten interest rates in a gradual and guarded manner to ensure that its efforts to rein inflation do not hamper economic growth.