The curtain has opened on FY11, but the credit scene in Pakistan remains the same - at least for now. And based on historical plays, this years final act is feared to have a depressive end. After a brief interlude of net credit disbursement between October 2009 and February 2010, net credit has been on a downhill on a month-on-month basis. The latest State Bank data show that July 2010 saw the biggest decline in private sector outstanding loans since July last.
As is usually the case, the net retirement of loans has been broad based; manufacturers as well as consumers have been on the sidelines in the face of growing economic headwinds. The former group is put off by a high cost of borrowing and a lack of consumer demand, which in turn convinces them to maintain lower working capital.
Loans for fixed investment have already been on a decline as textile makers, the biggest borrowers from the manufacturers lot, have just wrapped up an expansion in recent years. Besides, this is clearly not the time to set up new business ventures, given Pakistans fragile law and order condition.
Plus, credit growth has been historically driven by borrowings by the large-scale manufacturing sector. The trouble is that even before the floods, further LSM recovery was a big question mark, due to higher energy tariffs and the fading of the base effect seen in FY10 because of lousy economic activities in 2008/9.
For consumers, on the other hand, its not just about higher borrowing cost. Expectations of high inflation, 15-20 percent according to the Cabinets initial estimates released on Wednesday, risks of higher unemployment and overall slump in economic output are likely to hurt consumption, especially one based on credit.
Even if consumer confidence was to turn sanguine in the months ahead (though it seems very unlikely given the onslaught of successive ad news), banks as well as the government would not let private sector credit grow.
Banks, because of risks of high NPLs, and the government, because of higher fiscal deficit, which coupled with inflationary pressures, would require a policy rate hike, and in turn would add to the woes. At the time of writing this note, key government officials are in Washington to woo the IMF into relaxing the conditions. One of those include a bigger than previously allowed budget deficit, in the aftermath of the floods.
Whether or not the IMF approves of it, it is safe to assume that the budgetary gap will eventually be larger than what is currently projected. That means further crowding out of the private sector. The ray of hope, therefore, is excess liquidity in the form of imely foreign aid/grants and investment. But there are reasons to doubt both of them.
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