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Pakistan Govt borrowing from banks up 4.6%

KARACHI: Lending from commercial banks to the government increased by 4.6% to a total of Rs18.28 trillion despite a decline in deposits, leaving little room for businesses in the private sector to borrow in October 2022.

Citing data from the central bank, Arif Habib Limited reported that banks’ financing to the government (via investment in sovereign debt securities) stood at Rs17.48 trillion in September 2022.

Accordingly, the investment to deposit ratio (IDR) leaped by 497 basis points in a month, taking a significant jump to 81.6% in October, compared to 76.6% in the previous month.

A majority of the banks make safe lending to the government, which never defaults on repayment. They deviate from financing to private businesses and individuals to avoid risk of losses in shape of non-performing loans (NPLs) or bad debt in the country.

The government has continued to borrow more from banks to finance its budget deficit, as revenue collection remained low and expenditures remained high amid heavy losses caused by the 2022 floods.

In the wake of a slowdown in foreign currency inflows, the government’s reliance on domestic commercial borrowing has increased.

The commercial banks’ deposits, however, also dropped by 1.8% to Rs22.41 trillion in October, compared to Rs22.82 trillion in the previous month.

The drop in deposits may be attributed to slowdown in flow of workers’ remittances, which have remained the centre of growth in deposits over the past couple of years. The inflow of remittances decreased by 9% to, an eight-month low at, $2.22 billion in October, compared to September.

Secondly, a surge in the inflation reading to 26.3% in the period under review compared to 23.2% in the previous month, also encouraged people to spend more and deposit less during the month.

Credit from banks to the private sector slashed by 0.3% to Rs11.05 trillion in October, compared to Rs11.08 trillion in September, as businesses opted to repay previous loans instead of taking new ones under the provided circumstances.

Many businesses, however, are reporting partial or complete closure. Some blame the loss of business on the 15% benchmark interest rate currently prevailing, expensive and controlled imports, a significant depreciation in the rupee against the US dollar over a period and a drop in export earnings.

Pakistan’s leading businesses, including textile manufacturers and the fast-growing IT sector, are among those that have been negatively impacted by the current business environment.

Banking seems to remain the only sector in the country that has continued to report a significant growth in profits in the ongoing year 2022. As higher levels of safe lending, at exorbitant interest rates, continued and income increased due to the sharp depreciation of the rupee-dollar exchange rate, bank profit margins saw high rises this year.