KARACHI: Banks’ lending to the federal government surged by 182 per cent while lending to the private sector fell by 83pc in first nine months of the current fiscal year.

The State Bank of Pakistan (SBP) data showed that banks were keen to invest in government papers instead of lending to the private sector. While it reflects the government’s growing need for liquidity due to a shortfall in revenue collection, it also showed the increased risks involved in lending to the private sector due to unprecedentedly high-interest rates.

According to SBP, the lending to the federal government swelled to Rs2,940 billion from July to April 7 FY23 against Rs1,043bn in the same period of last year, showing an increase of 182pc. This huge increase in the government’s borrowing from banks was largely due to higher spending and poor revenue collection.

The revenue shortage was due to low duty collection since the imports have been drastically curtailed to save the foreign exchange reserves needed to make payments for debt servicing. Even high inflation, which hit a historic level above 35pc in March, could not boost the revenue collection through sales tax. The first nine months’ shortfall in revenue reached Rs278bn as total collection stood at Rs5.155 trillion against the target of Rs5.433tr.

Advances to private sector plunge 83pc in July-April

Another major reason for the shortfall of revenue could be the steep fall in lending to the private sector which slowed down the growth rate to the lowest level. During the first nine months, lending to the private sector plunged by 83.6pc or Rs993bn to Rs194bn against Rs1,187bn in the same period of last year.

While the banks feel that the high-interest rate has increased the risks in lending to the private sector, the private sector was also avoiding borrowing at rates not feasible to keep the business profitable.

The central bank has increased its policy interest rate to 21pc which means banks would charge over this rate from the clients depending upon the reputation of the private sector borrower. Industrialists and traders have already rejected the current interest rate saying it is unfeasible for businesses.

The poor lending to the private sector resulted in one of the lowest economic growth rates. The IMF and World Bank have reduced their growth projection up to 0.6pc for the current fiscal year.

Pakistan needs an average annual 6pc economic growth rate to absorb new job seekers and retain already working labourers. Below half a per cent growth rate means millions have already lost jobs while newcomers would not find a job in the shrinking economy.

Media reports show about one million Pakistanis, mostly skilled youth, left the country in 2022 mainly for seeking jobs abroad. The worsening political and economic situation could intensify brain drain from the country.

Published in Dawn, April 25th, 2023