For private sector credit offtake, FY20 wasn’t a good year. Data compiled by the central bank shows that less than Rs100 billion was doled out as net loans to private sector businesses, as the last quarter hit hard on the economy on account of Covid-19, leading to further dent on private sector credit offtake.
By nine months ending March 2020, loans to private sector was already down 66 percent on net basis. Then came Covid-19 in March 2020, and the ensuing lockdown. As a result, the quarter ending June 2020 saw a net retirement of Rs90 billion, which is the worst number since 4QFY13. Within the last quarter, May and June 2020 saw the biggest net retirement even as approved financing under the central bank’s Covid-19 related schemes more than doubled between April and June.
This trend, however, is not surprising, given Pakistan’s poor macroeconomic conditions even before Covid-19 struck the economy in March 2020. With the cost of borrowing hitting early teens amid a contracting manufacturing output (LSM down 5.4% in 9MFY20), private sector had to report a fall. Covid-19 made it only worse resulting in 83 percent year-on-year fall in FY20, the worst since FY12.
Unlike BR Research’s prior segment-wise analysis on private sector credit offtake, this year one will have to make do with headline numbers, since beginning FY20 the central bank has adopted UN’s International Standard Industrial Classification (ISIC) version 4, as against ISIC-3 used until FY19. In the absence of backdated data revisions, this update puts year-on-year comparisons of disaggregated credit data at the risk of being misleading.
Even after reconciliation of ISIC-3 data with ISIC-4 adopted since Jun 2019, some differences of credit data arrived at by using the two different classifications are rather material –about north of 10 percent in some cases. Hopefully, the central bank would task commercial banks to share at least last two years prior data as per the new ISIC-4 classification so as allow for meaningful analysis for the benefit of all stakeholders.
Be that as it may, the headline number is disconcerting. From a peak of nearly 20 percent in FY08, loans to private sector businesses as percentage of GDP has slid to 13 percent in FY20. In a country, whose successive central bank governors and finance ministers have been supposedly trying to increase financial inclusion and credit expansion, this is rather sloppy performance. For the record, India, Bangladesh, Sri Lanka, Iran, Nepal and many others put Pakistan’s credit to GDP numbers to shame.
If this is what Pakistan has to show for, with all the combined efforts and the hype by central bankers, federal government, and international partners, for all these long years, then what hopes does one really have for non-mainstream areas of economic development such as livestock or horticulture or pharma exports. On this note, the SBP would do well to start collecting and publicly reporting unique number of bank depositors and borrowers to be able to have a better pulse reading of financial inclusion in the country.