Here is good news: in the large-scale manufacturing sector, textile, fertiliser, electronic, leather, engineering and rubber industries have started growing.

The fertiliser output grew 15.94 per cent, followed by engineering 12.54pc and electronics 5.51pc in July-September. The production of leather, rubber and textiles increased 4.24pc, 2.29pc and 0.17pc, respectively.

But bad news is that large-scale manufacturing (LSM), on the whole, showed a 5.91pc year-on-year decline during this period. Nine industries of LSM, including food, pharmaceutical and automobile, recorded output declines, according to the Pakistan Bureau of Statistics (PBS).

The industries showing output growth are also doing well in exports. For example, in the first four months of this fiscal year, exports of all textiles grew 4.1pc to about $4.59 billion and leather products 12.9pc to $181.5 million.

Sector-specific incentives offered by the government and nearly sufficient lending to top industries like textiles and leather in 2018-19 saved them from a collapse and are now driving their output and exports. In spite of the repeated tightening of interest rates, the entire manufacturing sector continued to borrow in 2018-19 as much as banks were willing to offer.

Low domestic demand, high interest rates, dramatic policy U-turns and a fear of harassment by FBR and NAB have depressed demand for credit

They needed bank money to make up for the fall in their sales after domestic demand slumped as overall GDP growth tumbled to 3.3pc in 2018-19 from 5.5pc a year back.

During this fiscal year, however, both demand for credit and banks’ willingness to lend to the manufacturing sector have seemingly weakened. In 2018-19, banks had made net fresh loans of Rs297bn to manufacturing industries — down from Rs408bn a year earlier, but still enough to help them survive.

However, in the first four months 2019-20, the manufacturing sector has retired Rs36bn worth of bank loans on a net basis instead of borrowing afresh.

This suggests that high interest rates — with the central bank’s key policy rate still at 13.25pc — and still weak domestic demand continue to pinch industries. Besides, industries find it wiser to retire expensive bank credit now to create room for making less-expensive borrowing in the near future if the central bank opts for monetary easing.

Banks started making net fresh lending to the private sector quite belatedly this time — in November, the fifth month of the fiscal year. That is why the disbursement of net credit to the private sector between July 1 and Nov 15 stands at just Rs16.3bn — no match with the year-ago lending of Rs304.5bn. Persistently low domestic demand, high interest rates, dramatic policy U-turns by the government and a fear of harassment by the Federal Bureau of Revenue (FBR) and the National Accountability Bureau (NAB) have apparently depressed credit demand. But it does not bother banks because they continue to lend heavily to the government. Besides, they are busy straightening credit portfolios of their borrowers after witnessing a surge in non-performing loans (NPLs) in the last fiscal year.

Between July 1 and Nov 15, banks’ net lending to the federal government totalled Rs157bn. But their gross lending was huge — Rs927bn — during this period as the government is borrowing mainly from commercial banks and meagrely from the central bank.

It is doing so to rein in double-digit inflation and meet a technical condition attached with the $6bn lending programme of the International Monetary Fund (IMF).

A tight monetary policy amidst an economic slowdown in 2018-19 had led to an increase in the stocks of NPLs to Rs768bn from Rs623.6bn in 2017-18. Banks are now striving to contain growth in NPLs. That has made them extra cautious in lending to the private sector.

But industries do need bank borrowing for both survival in these tough times and becoming more competitive in export markets. Chocking their source of funding is not advisable. But allowing them to get away with NPLs is not an option either. The best way forward for industries is to get their credit worthiness restored by regularising loan repayments in due consultation with banks.

For banks, it is necessary to enhance interaction with industries struggling with loan repayments and show them how efficiently they can straighten their books. Meanwhile, banks ought to enhance credit distribution to newer and least-serviced segments of industrial value-chain. Without this, the revival of LSM and, in turn, the entire industrial sector will remain elusive. That will lean a negative impact on the banks’ mid-to-long-term profitability as well as our economy.

Banks add a few percentage points over the cut-off yields of treasury bills and bonds while lending to industries. Besides, they earn money from private-sector borrowers on a raft of banking services, including investment advisory. Just investing in government bills and bonds is not as profitable for banks as lending to the private sector.

In July-October, the food industry’s output declined 8pc and that of the pharmaceutical industry 11.95pc. The production of automobile manufacturing plunged 34.13pc. A massive rupee depreciation of 31.7pc in 2018-19 made the manufacturing of motor vehicles too costly. Lower economic growth and a consequent fall in purchasing power made automobiles unaffordable even for people in upper-income groups. The depreciation plus high inflation also forced people to cut spending on food. So the reasons for depressed demand are obvious and partly explain the lower appetite for bank credit from auto and food industries.

That is why banks’ lending for the manufacturing of automobiles increased by only Rs7bn in July-October and consumer financing for motor vehicles came to a halt. Lending to the food manufacturing industry witnessed a net decline of Rs11bn, data released by the central bank shows.

Published in Dawn, The Business and Finance Weekly, December 2nd, 2019