FOREIGN exchange markets did not panic at all as Pakistan began to repay an IMF loan last week. Nearly $400 million went out of the state coffers as part of the first instalment of $1.2 billion of an IMF loan repayment but for banks and foreign exchange companies it was business as usual. The rupee rather remained stable.

Senior bankers said that the outflow of $399 million towards the end of the last week caused no jitters because the market was confident that with some $17 billion reserves Pakistan was capable of repaying the IMF loan. To reinforce this view, some said, the central bank even made some dollar selling in the interbank market the same day.

“It was a signal to the market that the country had enough forex reserves to meet its external obligations and that those trying to speculate against the rupee (on the occasion of unusually large outflows) would turn out to be the losers,” remarked chief foreign exchange dealer at a foreign bank.

However, another forex dealer at a local bank said that forward dollar buying by the State Bank of Pakistan in previous weeks had provided the central bank with the cushion to ensure discipline in the market during and after the IMF loan repayment.

Bankers said that tighter rules on forward cover buying by importers enforced several weeks ago by the central bank had also made it next to impossible for banks to create artificial shortage of dollars on the pretext of a huge outflow from the market.

Chief executive of a leading foreign exchange company said repayment of the IMF loan could not impact the rupee in the open currency market because of steady inflow of home remittances and also because those investors who had amassed dollars in last few months were now busy taking advantage of stocks market recovery.

Meanwhile, recent data released by the SBP showed continued improvement in bank credit to the private sector. Private sector’s borrowings from banks from July till February 10 totalled Rs252 billion—46 per cent higher than its borrowings in the year-ago period.

Bankers pointed out that record cotton output in particular and better showing of agriculture sector in general plus recovery in large-scale manufacturing and lower interest rates were behind the rising demand for private sector credit. According to a SBP report, banks disbursed Rs149 billion to agriculture sector in seven months to January 2012.

“My own bank has seen 20 per cent plus increase in financing to cotton ginners despite depressed cotton prices,” said head of credit division of a large local bank. “It is a separate story though that most cotton ginners and other players in textile production chain including yarn makers continue to cry foul about high interest rates. Interest rates are certainly below the last year’s levels. Otherwise, you wouldn’t have seen larger intake of private sector credit,” he insisted.

Data released by the SBP show that fresh average lending rate of banks fell one full percentage point to 13.51 per cent in January this year reflecting the impact of 200 basis points cut in the SBP policy rate last year.

Bankers say that less than one per cent growth in LSM in the first half of the current fiscal year against decline of about 1.8 per cent in the same period of the last year is a ray of hope for them.

“We know that LSM grew 18 per cent in December over November. This high growth trend may weaken in coming months but would certainly continue, according to our projections,” said head of corporate division of another large local bank citing strong corporate earnings in food, fertiliser and cement sectors. “So, private sector credit demand is likely remain strong till the end of the current fiscal year.”

In FY11 when GDP grew just 2.4 per cent, net private sector credit off-take from banks was a meagre Rs121 billion. The government is confident that the economy would grow at 3.6 per cent in FY12. “Naturally then, the private sector credit would expand accordingly,” said a senior executive of the state-run National Bank of Pakistan.

He said that larger distribution of private sector credit negated the notion that excessive government borrowings from banks was crowding out the private sector.

“The fall in (fresh average) lending rate of banks from 13.66 per cent in December to 13.51 per cent in January is a proof that higher borrowings of banks (which continued throughout January) do not automatically increase banks’ lending rates.” Bankers say that the most important drivers of lending rates for corporates are the risk profiles of the borrowing entities and the liquidity and profitability issues of the banks.