ISLAMABAD, June 8: The Monetary and Fiscal Policies Coordination Board here on Saturday took notice of the general misconception about the low credit expansion to private sector during the current fiscal year.

The Board which was presided over by Finance Minister Shaukat Aziz was informed by the Governor, State Bank of Pakistan, that on the contrary, private sector credit expansion was more or less of the last year’s level.

It reviewed the overall economic situation in general and monetary developments in particular. The board noted with satisfaction the overall economic performance during the fiscal year 2001-02. Given the difficult external economic environment caused by the events of September 11, continuation of catastrophic drought conditions, and heightened tension with India after the incident of December 13, the overall economic performance has been reasonably good.

The board also reviewed the developments in monetary sector with special reference to credit to the private sector.

Although credit to private sector amounted to Rs31.6 billion until April 27, 2002 as against Rs76.4 billion in the same period last year, it conceals many other developments which are not known to the public.

On the face of it, according to an official announcement, private sector credit expansion presents a dismal picture but the same is not necessarily true for the following reasons. Firstly, as it is well-known, the figures of monetary expansion or for that matter credit to private sector are on net basis (gross disbursement minus retirement). Therefore, higher credit expansion last year means more retirement in the current fiscal year. Credit to private sector amounted to Rs76.4 billion last year therefore, retirement has also been higher given the effectiveness of loan recovery drive and prudent lending by the banks.

Secondly, excluding export refinance, credit to private sector during this period amounted to almost Rs47.3 billion as against Rs71.2 billion in the same period last year. In other words, there were accelerated retirement of export finance (Rs15.7 billion) as against net expansion of Rs5.2 billion during the same period last year. Retirement of export finance at accelerated pace was the result of the declining rates of the fund as exporters thought this as an opportunity to get new funds at lower rates.

Thirdly, credit to private sector was low because of the relative lower requirement for cotton-related activities in view of lower prices of raw an lint cotton. Almost Rs20 billion less credit was disbursed on this account.

Fourthly, higher tax refund by the CBR to the extent of Rs18 billion during this period led to greater internal financing by businesses and therefore, reduced the credit needs of the private sector to that extent.

Fifthly, unlike in the past, the private sector is now reducing their reliance on commercial banks for their credit requirement and turning towards non-bank financing. For example, the private sector has issued Term finance Certificates (TFCs) worth Rs8.6 billion during July-May 2001-02, compared to around Rs4.5 billion in the corresponding period of last year. Furthermore, after a number of years, corporates have raised significant amounts of financing directly from the capital markets. According to Data from the Karachi Stock Exchange, till the first week of May 2002, Rs5.7bn was raised through initial Public Offerings (IPOs) or right issues, compared to 3.5 billion for the whole of fiscal year 2000-2001.

After adjusting all these developments it would appear that credit to the private sector has been higher or at best remained at last year’s level. The board was also informed that the weighted average lending rate has declined by 2 percentage points, that is, from 14 per cent last year to 12 per cent this year. This was made possible because SBP eased its monetary stance after the events of September 11 and in the process reduced its discount rate by 5 percentage points (i.e. from 14pc to 9pc). During this period, the SBP also reduced its T. bills auction rate through market mechanism by almost 6 percentage points (i.e. from 13pc to 7pc). The board commended the SBP for successfully keeping inflation at low level through its efficient monetary management.