Economic red flag: Govt borrowings rise, private sector's fall

KARACHI: In the first half of 2024, government borrowing increased while the private sector saw a continued decline in borrowing from banks, according to the State Bank of Pakistan’s (SBP) mid-year review. This reflected subdued demand for credit owing to stagnant growth amid an unconducive business environment in the country.

The private sector lending contracted by 0.6%, marking a modest improvement from the 7.0% contraction seen in 2023, as per the Mid-Year Performance Review of the Banking Sector January – June 2024.

The report highlights that while economic activity and business confidence recovered, the corporate, SME, and consumer segments—the major drivers of private sector credit—witnessed significant loan repayments instead of new borrowings. Specifically, the corporate sector repaid loans amounting to Rs. 77.3 billion during the period.

Moreover, borrowings in the SME sector fell by Rs. 51.5 billion, primarily driven by a reduction in working capital financing, while consumer financing also contracted due to auto loan retirements. The trend is attributed to high interest rates and stringent macroeconomic conditions.

In contrast, the public sector continued to absorb credit from banks, with public sector advances growing by 3.9%. This increasing reliance of the government on bank credit for budgetary needs is seen as a contributing factor to the reduction in private-sector borrowing.

Despite a relatively stable economic environment and improved liquidity conditions, the reluctance of the private sector to make borrowings reflects broader uncertainties, such as inflationary pressures and market conditions, which have discouraged fresh investments and credit uptake.

The contraction in private sector lending reflects broader economic challenges in Pakistan that have dampened demand for credit, even as the overall banking sector saw growth. This is largely driven by a shift in banking preferences toward safer investments, with banks increasingly favouring government securities. The share of investments in government securities rose significantly, contributing to 93.1% of the growth in banks’ asset base during the first half of 2024.

The decline in private-sector borrowing has been further exacerbated by high interest rates, which continue to impact sectors such as auto financing, SMEs, and corporate loans. Auto financing, for instance, saw a reduction of Rs. 21.9 billion, while credit card loans increased slightly by Rs. 14.4 billion, indicating a shift in consumer behaviour due to inflationary pressures, according to SBP Banks report H1CY24.

Sectoral analysis shows that key industries, such as textiles and energy, which have historically relied on bank financing, also contributed to the decline. The textile sector alone retired Rs. 70 billion in loans during the period, following its seasonal pattern, while the energy sector repaid Rs. 35.8 billion.

The banking sector’s focus on government lending over private credit is a trend that could hinder long-term private sector growth. This shift, driven by the government’s high demand for financing to meet its budget deficit, has limited the availability of funds for private enterprises. As a result, the Advances to Deposit Ratio (ADR) fell to 37.1% by June 2024, from 45.0% a year earlier, signalling the persistently weak private sector demand for credit.