KARACHI: The PMLN-led coalition government borrowings from banks swelled over 377 per cent to Rs1,398 billion during the first seven months of the current fiscal year compared to Rs293bn in the same period last year.

The bank advances to the private sector plunged 49.5 per cent during the July-January period of 2022-23, suggesting an economic slowdown.

Amid revenue shortfalls, the PDM government kept borrowing aggressively from banks through treasury bills and Pakistan Investment Bonds (PIBs) auctions to meet its growing expenditures at very high-interest rates.

The banks are parking their maximum liquidity in the government papers to earn record risk-free profits as high as 17.9pc, hence are reluctant to take a risk to extend loans to the private sector at high markup rates.

The government has announced a plan to borrow Rs5.7 trillion more in the next two and half months from banks.

Advances to private sector plunge 50pc in 7MFY23

The growing borrowing is adding very costly debt to the government’s stock of domestic debts. The cumulative domestic debts reached Rs33.596 trillion by Nov 30, 2022. The debts accumulated through scheduled banks reached Rs14.63tr by end of FY22.

The direct impact of higher government borrowing from banks was a massive drop in lending to the private sector amid growing risks due to a high-interest rate, as it also reflected a slowdown in economic activities.

The private sector credit off-take fell to Rs396.7bn during July-January compared to Rs785.8bn in the same period last year, indicating the economic growth rate could hardly be 2pc in FY23.

While domestic investment has hit the bottom rock, the banks are also reluctant to extend loans to the private sector. Most of the borrowing from the private sector is short-term.

The State Bank of Pakistan in its report reveals that the conventional banks provided Rs416.7bn to the private sector in 7MFY23 compared to Rs520bn last year. It borrowed Rs90.8bn from Islamic banks compared to Rs103.9bn in the same period last year.

However, the Islamic banking branches of commercial banks experienced a different situation since they are still receiving debt retirement from the private sector. The Islamic branches noted a net retirement of Rs110.8bn in 7MFY23 against lending of Rs161.8bn in the same period of last year. The Islamic branches’ lending in FY22 was Rs401bn compared to Rs224bn in the preceding year FY21.

Bankers believe that lending to the private sector may fall further low since the uncertainty on political and economic fronts is still dominating the country. Foreign investment has already fallen to negative showing a lack of confidence while domestic investors were found afraid of very high inflation.

The inflation in January was 27.5pc giving little chance to investors to earn profit. Bankers look satisfied with the situation as their earnings would record high this year CY2023 due to costly lending to the government. Banks are the only profitable sector under the current economic crisis.

Published in Dawn, February 5th, 2023