The economy is doing well but political stability is lacking

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KARACHI:

The International Monetary Fund (IMF) says the Pakistani economy can grow 1.5% during the year. The World Bank says it can only grow by 1.3%. But the governor of the State Bank of Pakistan (SBP) still estimates that the country’s gross domestic product (GDP) can increase by up to 3%.

He proudly points to a strong recovery in large-scale manufacturing, better prospects for agricultural growth, a skyrocketing increase in remittances, an upward trend in exports and a reversal of the current account deficit as key indicators of strong economic recovery.

And, he is to a large extent right. This is why independent economists have also started to question the growth projections of the IMF and the World Bank.

One of the key elements of a strong economic recovery is the use of private sector credit. And, luckily, Pakistan has started to do better on this front as well.

In the nine months of the current fiscal year, between July 1, 2020 and April 2, 2021, net bank lending to the private sector increased to Rs 444.5 billion from Rs 332.8 billion over the past nine months. the comparable period of the previous fiscal year, according to SBP Statistics.

The increase in private sector lending by banks indicates that businesses are doing better than before. Some companies seek working capital from banks as the demand for their products has increased, some companies seek funds for capital expenditure for balancing, modernization and replacement (BMR) and some use bank financing to increase their existing fixed investments.

All of this means that they see greater future demand for their goods and services and more optimistic spending trends from consumers.

On the other hand, part of the private sector lending by banks is channeled to end consumers in the form of mortgage financing, car financing or personal loans for the purchase of household items or to meet higher expenses. high levels of health, education, etc.

Read: The economy will keep pace with the recovery

Points to consider

However, there are some things that are of concern and need to be carefully analyzed.

First, the resumption of private sector lending by banks to businesses and consumers is largely due to the fact that the Pakistani economy contracted 0.4% in the last fiscal year and private sector lending for the The whole fiscal year reached only 196 billion rupees.

Second, the current upward trend in private sector borrowing owes a lot to the reduction in interest rates – from 13.25% to 7%.

And third, while nine-month private sector loans in FY20 reached 332.8 billion rupees, they fell to 196 billion rupees in the last quarter. This means that nine-month private sector loans of Rs 444.5 billion in this fiscal year may also experience a downward trend in the April-June quarter. Or, at least, it can’t increase much in the last trimester.

In Pakistan, lending to the private sector normally begins to recover in the first quarter of a new fiscal year, that is, July-September, increases in the second quarter, peaks in the third and then decreases in the fourth.

We have seen some deviations in this trend in the past, either due to an adjustment in interest rates or due to above average economic growth or contraction. But overall, this trend continues.

In the fourth quarter of FY21, we can expect such a deviation from the historical trend for two reasons.

First, hundreds of billions of concessional loans approved by the SBP since March 2020 are in the pipeline. Second, even nonconcessional loans are cheap and the central bank has made it clear in its monetary policy statement that low interest rates are here for a while.

This means that unlike the past when businesses and consumers were unsure of interest rate movements and wanted to write off all debts from the previous year by June, this year they are not in such a rush.

Another thing that gives hope that lending to the private sector will not decrease in April-June of this year is that the agricultural sector is doing well and the demand for agricultural credit also remains stronger than in the last quarter of the fiscal years. previous ones.

In addition, banks are now inundated with liquidity and can afford to lend generously to the private sector as well as to the government with equal ease.

In the nine months of FY21, they have already loaned 1.97 trillion rupees to the federal government, compared to 1.5 trillion rupees in the nine months of the previous fiscal year.

Read more: PM hopes Tarin will turn around the economy

Political conditions

However, higher private sector bank financing in a low interest rate environment alone cannot guarantee stronger private sector performance in the absence of political stability and good governance.

The current political situation in Pakistan can hardly be called stable and the recent Lahore incident has exposed all the claims of good governance.

What further compounds the problem is the skyrocketing of the third wave of the Covid-19 pandemic. The mini and smart closings, shortened business hours and two-day market closings, necessitated by the increase in Covid-19 cases, will certainly slow down the ongoing economic recovery to some extent.

If political polarization is allowed to develop and if the government’s mandate is not established affecting the general situation of law and order, then there seems to be little hope for the economy to increase by 3%.

Thus, all federal and provincial governments and all political forces must join hands to avoid slower-than-necessary GDP growth.

We all know that in the context of an economic recession of 0.4%, growth of 3% is just what it takes to avoid a whirlwind of unemployment and a painful drop in people’s net income amid high inflation. by 9%.

The writer is a mechanical engineer and makes masters

Posted in The Express Tribune, May 3e, 2021.

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