KARACHI: The surging interest rate has left no option for the private sector to borrow costly money for running their businesses or plan expansion due an uncertain situation caused by the persistent political and economic instability.

The State Bank of Pakistan (SBP) data showed that the banks’ advances to the private sector had been declining as the fiscal year is approaching closure.

The private sector borrowings plunged by 74.3 per cent to Rs266.4 billion during the first nine months of the current fiscal year compared to Rs1,036.6bn in the same period last year.

The steep fall in credit off-take to the private sector was not only because of the record interest rate but also due to persistent political and economic instability. Bankers believe money never goes for risks and the current situation is full of risks.

At the last auction of treasury bills held on April 4, it was visible that banks prefer to park their liquidity in government securities to earn risk-free high profits.

The government picked Rs2.2 trillion against the target of Rs900bn while the maturity amount was even less than the auction target.

Banks have been making heavy investments in government papers. More than Rs15tr have been invested in the Pakistan Investment Bonds (PIBs) so far and over Rs6tr in T-bills. These huge investments make banks profitable each year.

The State Bank under the guidance of the IMF increased the interest rate by 300 basis points in March and 100bps in April taking the policy rate to a record 21pc. The unprecedented CPI-based inflation at 35.5pc in March has worsened the situation as it increased the risk much higher for investments.

Amid revenue shortfalls, the government is borrowing much more than the auction target to meet its rising expenditures despite strict measures demanded by the IMF.

For bankers, investing costly money for profit-making ventures looks impossible, particularly in the wake of still rising inflation.

The massive interest rate hikes with short intervals by the SBP have only made the money the costliest ever but the strategy has utterly failed to achieve the core objective of taming inflation.

Published in Dawn, April 8th, 2023