GOVT BORROWS HEAVILY FROM BANKS

AMANULLAH BASHAR
(feedback@pgeconomist.com)

June 28 - July 04, 2010

Heavy government borrowings estimated to 80 percent of the total credit distribution by the commercial banks keep up the inflation and interest rates on the higher side while depressing the economic activity as government and the public sector organisations left a very little for the private sector during outgoing financial year ended on June 30, 2010.

According to informed sources, out of the total disbursement of Rs316 billion by the commercial banks 80 percent goes to government and public sector organisations obviously at the cost of private sector which has consumed only Rs76billion during outgoing financial till to date.

It is interesting to note that the Finance Minister Dr Hafeez Shaikh while pointing out the gray areas in the economy stressed on minimum borrowing from the banking sector to contain the inflationary pressures as well as to cut down the high interest rate which is at 12.5 percent today.

Although the current trend of borrowing by the government was slightly improved compared to last year where private credit multiplier declined to a historical low yet the trend of heavy borrowing has its multiplier effects including mounting inflation and consequently high rate of interest and contracted economic activity in the private sector which deserves a greater importance even in accordance with the economic agenda of the government of the day.

Sources said that in the face of current domestic liquidity condition and IMF quantitative target of zero net borrowing from the State Bank of Pakistan could be a difficult proposition to be materialised. In fact, the increase in fiscal deficit for the outgoing fiscal year estimated at 5.2 per cent as compared to 4.9 per cent target of previous year was the root cause of the depression as well as attributed to the shortfall in committed flows by the Friends of Democratic Pakistan (FoDP), delay in disbursements by IFI's, and backlog from Coalition Support Fund (CSF).

AGRICULTURE LOANS

Agriculture sector seems to be a major recipient of the bank loans during financial year 2010 resulting better crops yet the trickle down effects of bumper crops including rice, wheat and cotton were not reflected in the persisting food inflation. It was naturally expected that the better crops would stabilise the food prices with the improved supplies.

It is learnt that the major chunk of the infected portfolio or Non Performing loans belongs to agriculture and the textile sectors. This trend also needs to be rectified for a better rate of recovery as well.

According to official data, agricultural credit disbursement by commercial and specialised banks rose 6.40 percent year-on-year to Rs215.039 billion in the first eleven months (July-May) of the current 2009-10 fiscal year (FY10).

In absolute terms, disbursement of credit to the agriculture sector increased by Rs12.934 billion in July-May, 2010 when compared with total disbursement of Rs202.105 billion in the same period last year.

Overall credit disbursement by five major commercial banks including Allied Bank Limited, Habib Bank Limited, MCB Bank Limited, National Bank of Pakistan and United Bank Limited stood at Rs107.015 billion in July-May, 2010 compared with Rs98.229 billion in July-May 2009, depicting an increase of Rs8.786 billion or 8.94 percent.

Zarai Taraqiati Bank Limited, the largest specialized bank, disbursed a total of Rs67.741 billion in July-May, 2010, up 7.10 percent when compared with Rs63.249 billion in the same period last year, while disbursement by Punjab Provincial Co-operative Bank Limited stood at Rs3.861 billion in July-May, 2010 compared with Rs4.018 billion in the same period last year. Besides, 14 domestic private banks also loaned a combined Rs36.423 billion in July-May, 2010 compared with Rs36.609 billion disbursed in July-May, 2009.

It may be recalled that the State Bank of Pakistan has set an indicative agricultural credit disbursement target of Rs260 billion for FY10. Banks disbursed a total of Rs233.01 billion to the agricultural sector in FY09.