KARACHI, Oct 31: Credit supply to private sector took a nosedive during the last three-and-a-half months, creating doubt about the economic growth at the desired rate of over seven per cent for 2007-08.

Last year the credit off-take by the private sector dropped substantially, but the trend picked up pace to fall sharply with the beginning of new fiscal 2007-08.

The State Bank on Wednesday reported that the private sector consumed just Rs23.533 billion from July 1 to Oct 20, 2007 against Rs69.870 billion in the corresponding period last year.

This was one third of what the private sector borrowed last year during the said period. The Central Bank which is responsible for credit behavior, said recently that the country would achieve the GDP target this year.

The tightening of credit flows continued for a couple of years, but the impact has started appearing now. The State Bank kept the money market under liquidity crunch with a policy to cut the flows.

Bankers said credit has been directed towards the government securities which provide risk-free good return. They said the return on government papers is enough to manage profitability while keeping the banking spread as high as 7.2 to 7.5 per cent.

Banks have recently announced nine months financial results that showed 15 per cent growth in their profits. However, the banking spread was still above 7.3 per cent giving no relief to depositors bound to receive negative return on their deposits.

The government has set a higher export target this year which demands more economic activity but industrialists say the interest rates have gone up and reaching 15 to 18 per cent making their products costlier.

The Central Bank was not impressed with this situation as it argued that the higher interest rate would curtail the credit demand means lowering of inflation.

Analysts said the lower credit to private sector would finally result in lower economic growth which may derail growth trend of seven per cent and above.

“The impact will be visible at the end of this fiscal if the credit to private sector remains at the level it showed in the last three and half months,” said an analyst.

This slow credit growth has produced desired results for the lower monetary growth which was the real target for the Central Bank to target the inflation. The inflation has been the focal point for the SBP’s Monetary Policy but so far it remained at the level much higher than the expectation. The fiscal 2006-07 had an inflation target of 6.5 per cent but the main inflation remained at 7.8 per cent.