Bank lending to the federal government increased by 182% in the first nine months of the current fiscal year, while loans to the private sector decreased by 83%.
According to data from the State Bank of Pakistan (SBP), banks were eager to invest in government securities rather than lend to the private sector. While it shows the government’s growing need for cash as a result of a revenue shortfall, it also demonstrates the heightened risks associated with lending to the private sector as a result of historically high-interest rates.
According to SBP, lending to the federal government increased 182 percent from July to April 7, FY23, to Rs2,940 billion from Rs1,043 billion in the same period last year. The government’s borrowing from banks increased dramatically as a result of increased spending and poor revenue collection.
The income shortfall was caused by low-duty collection as imports were substantially reduced to save the foreign exchange reserves required to make debt servicing payments. Even rising inflation, which reached a historic high of more than 35% in March, was unable to increase revenue collection through sales tax. The income gap in the first nine months was Rs278 billion, with total collection standing at Rs5.155 trillion below the target of Rs5.433 trillion.
Advances to the private sector fell by 83 percent between July and April.
Another important explanation for the revenue shortfall could be a sharp drop in lending to the private sector, which has slowed the growth rate to its lowest level. Lending to the private sector fell by 83.6 percent, or Rs993 billion, to Rs194 billion in the first nine months of the year, compared to Rs1,187 billion in the same period the previous year.
While banks believe that high-interest rates have raised the risks associated with lending to the private sector, the private sector has also avoided borrowing at rates that are insufficient to maintain the business profitable.
The central bank has raised its policy interest rate to 21%, which means that banks may charge clients more than this rate based on the reputation of the private sector borrower. The existing interest rate has already been rejected by industrialists and traders as unsustainable for enterprises.
Poor lending to the private sector resulted in one of the lowest rates of economic growth. The IMF and World Bank have cut their growth forecast for the current fiscal year to 0.6 percent.
To absorb new job seekers and retain existing workers, Pakistan needs an average annual economic growth rate of 6%. A growth rate of less than 0.5 percent means that millions of jobs have already been gone, and entrants will be unable to find work in the decreasing economy.
According to media reports, over one million Pakistanis, mainly trained youth, will leave the country in 2022, primarily to seek employment abroad. The worsening of the country’s political and economic status could lead to a brain drain.
