KARACHI, Feb 4: The federal as well as provincial governments have started retiring bank credit to meet the target set in the annual credit plan in consultation with the IMF.

The State Bank statistics show that the government sector had retired about Rs8 billion bank credit up to third week of last month. According to the 2001-02 credit plan the government sector is supposed to retire Rs54 billion bank credit at the end of the fiscal year in June.

Senior bankers say credit retirement by the government sector has created space for the banks to channelize more credit towards the private sector. By the end of the third week of January banks had lent more than Rs41 billion to the private sector. Under the credit plan the private sector is to get Rs98 billion up to June.

Bankers say since the government sector had borrowed heavily from banks in the first two quarters of this fiscal year, its borrowing appetite reduced in the third quarter. That suited the economy most as the private sector credit demand, which had been too low in most part of the first two quarters, picked up in the third. Had the government sector too stayed away from borrowing, the contraction in money supply would have slumped the economy.

Bankers say with the inflation at less than 3 per cent in the first two quarters of this fiscal year there is still room for monetary expansion in the third and fourth quarters: The target set for inflation is 5 per cent for fiscal 2001-02.

But in terms of quantitative target of monetary expansion the room is not that wide: SBP statistics show that up to third week of January monetary expansion was at Rs119 billion (7.8 per cent) against the full fiscal year target of about Rs146 billion (9.54 per cent). But central bankers believe the target could be met easily. They pin their hopes on fast-paced government sector credit retirement amidst higher offtake of private sector credit.

But falling revenue collection may force the government to retire less of bank credit than targeted dashing their hopes. In that case a lower than targetted private sector credit would keep monetary expansion within the desired limits.

Senior bankers and financial analysts say they cannot rule out either of the two.

Provisional figures put revenue collection at a little less than Rs203 billion in the first seven months of this fiscal year against the target of Rs230 billion. Similarly net credit flow to the private sector is set to slow down sometime in the last quarter with sugar financing and wheat financing having been over.