Is credit off-take jump sustainable?

After six straight months of net debt retirement, private borrowers finally rallied on credit counters in October; the count rose as high as Rs44 billion - making October the biggest net credit disbursement month since December 2009.
Compared to the same period last year, private credit off-take was up 118 percent in the Jul-Oct period, largely led by recovery in agri, textile and trade and commerce sector borrowing. But does this mean that private sector has suddenly found confidence in the economy? No! Not quite likely.
The fact that recovery in credit off-take stemmed mainly from agri, textile, trade and commerce sector, it suggests that the growth in question cannot be expected to sustain itself in the months ahead.
"The seasonal increase in the working capital credit requirements of the private sector during the second quarter is also higher on the margin due to higher input prices," the central bank noted in its last monetary policy review.
According to data released by the State Bank of Pakistan, net loans taken for growing of crops stood at Rs4.8 billion in Jul-Oct period, up from Rs1.6 billion in the year ago period. Similarly, those in the textile business took net loans of Rs25 billion in the four months ending October, up from Rs23 billion in the same period last year.
But perhaps the biggest change was seen in credit taken by those involved in commerce and trade business. SBP data show that traders took net loans of Rs7 billion between Jul-Oct compared with net retirement of Rs5 billion in the corresponding period last year.
This came mainly on the back of some Rs11.4 billion borrowed by the retail sector businesses in 4MFY11, as against a meager borrowing of Rs1.8 billion in the comparable period last year. This can perhaps be attributed to stockpiling on the part of retailers who normally rely on suppliers credit instead of bank credit.
"The rise in borrowing might be due to marginal increases in commodity prices that have jacked up the requirement of bank credit, but the bigger possibility is that big retailers have bought huge quantities of food and consumer items in anticipation of higher prices ahead," says AB Shahid, a seasoned banker and economist.
Whether or not retailers are actually up to stockpiling, the rise in credit off-take to the sector can not be expected to continue at the same pace - just as the seasonal jump in agri related financing can be projected to maintain its trend.
So, if the private sector is to be really given breathing space, fiscal authorities need to demonstrate a greater resolve in implementing their strategy to contain the fiscal deficit through fundamental structural reforms and their commitment to restrict inflationary central bank borrowings.
Until that happens, private credit off-take can be expected to remain volatile with more movements on the downside.