Apr 5 - 11, 2010

A comparatively better liquidity position, improved LSM growth, and a fairly satisfactory agriculture output have so far failed to restore the credit off-take levels of FY07 & FY08. The delay in the receipt of external assistance funds from different sources have made the government borrowings from the banking system grow in size besides putting a sort of freeze on public sector development program spending. Government's higher non-developmental expenditure (including that relating to the war on terrorism) vis-a-vis low revenue collection has given rise to liquidity constraints thereby crowding out the private sector credit so vital to maintain the economic recovery process. Banks' mounting NPL portfolios and now their endeavor to write quality loans only have also kept the private sector credit from growing. The resurgent inflation and renewed external account risks have been the cause of SBP reluctance to ease the policy rate. This further raises doubts about any dramatic expansion in private sector credit. The, recently released, 2nd SBP quarterly report sums up the credit off-take scenario in the following words:

"The trend decline in private sector credit, visible for twelve consecutive months, reversed from October 2009 as (1) the demand for seasonal finance (that is cotton, sugarcane and rice) picked up and (2) a mild recovery was seen in domestic demand. Consequently, cumulative credit to private sector grew by 4.7 percent during Jul-Feb FY10; slightly lower than the growth seen in the corresponding period a year earlier."

The growth of private sector peaked in FY04 and FY05 when the sector recorded unprecedented growth of 34.3 percent and 34.4 percent respectively. The subsequent years that is FY06, FY07 and FY08 saw the private sector growth declining to 23.5, 17.3 and 16.5 percent respectively. FY09 was the worst year when the private sector remained almost stagnant recording a meager growth of 0.8 percent. This was the year when the economy had to absorb a three pronged attack: the backlash of global financial meltdown, the impact of high global oil and commodity prices and the domestic change of political guards-the last one being the most ferocious and damaging from economic point of view as it culminated in massive outflow of dollar and huge devaluation of rupee.

The economic activity almost came to a grinding halt and the demand for credit dwindled amidst a high interest rate and growing business loan defaults particularly in the textile sector. The entire FY09 went through a period when credit, besides being expensive and hard to come by, was not much in demand. The textile sector, in particular, recorded a surprisingly low off-take of just Rs2.4 billion during the first nine months of FY09. The other casualty was the consumer finance which recorded a negative off-take of Rs.47.1 billion during the same nine month period.

The private sector borrowing between the first nine months of FY10 stands around Rs.110 billion. This trend might induce a sense of betterment as compared to the recent devastating past, yet a long uphill distance remains to be traversed for the private sector to reach a point when the growth process could gain real momentum. Any dramatic change in the private sector economy is, however, not in the offing as a number of daunting issues still remain unresolved. The issue of liquidity arising from high government borrowings from the banking system coupled with the delayed arrival of foreign assistance; the issue of enlarged size of NPLs and banks' renewed focus on the quality of credit; the issue of resurgent inflation and the stalling of SBP policy rate; and finally the issues of energy and security. All these factors add up to the cost of doing business. The restriction on consumer finance by the banks and the drastically diluted purchasing power of people are going to have their effect on consumer spending. Government spending on public programs is also minimal.

The diminished economic activity, high cost of production amidst a faltering consumer demand, and rising prices owing to the corrupt administrative policies, all sum up to a situation of stagflation.

How can we get out of it? The answer will determine the pace of private sector growth. Besides domestic liquidity strain, pressure on external side is also building as delayed disbursements, higher foreign debt servicing, choked foreign investment inflow and an unexpected surge in oil prices (which is always on the card) can combine together to give a jolt to the external economy. This will result in rupee getting further devalued to the detriment of the domestic economy.

Even in this bleak scenario, there is something to sing about. The LSM sector has recorded a positive growth of 2.34 percent during Jul-Jan FY10 as against a negative growth of 5.35 percent during the same period of previous year. This augurs well for a rather depressed economy. The agriculture sector growth, though missing some targets by small margins, has also been fair up till now. With the induction of the new financial advisor to the prime minister, who happens to be a technocrat of highest integrity, one can hope to see an early revival of the economy. He doesn't need to be told by anyone that the agriculture and manufacturing sectors are the backbone of our real sector economy and we need to grow them to their potential. The manufacturing sector, however, needs to be diversified with more focus on its new and upcoming sub-sectors with gradually decreased reliance on textile sector.