Private sector returns billions despite falling interest rates

In Karachi, Pakistan, the private sector has continued to repay borrowed funds, resulting in a significant decline in bank advances during the January-March quarter of FY25. According to data from the State Bank of Pakistan (SBP), even after a drastic cut in the policy rate by 1,000 basis points to 12% from an unprecedented 22% in June 2024, the trend of loan retirement remained strong. By the end of the second quarter on December 31, 2024, the total private sector borrowing was recorded at Rs1.4 trillion. This indicates a concerning shift within the private sector as it opted to retire debts rather than seek further borrowing. In particular, the analysis revealed that loans returned totaled Rs712 billion in the third quarter of FY25, emphasizing a remained sentiment among private entities to manage their debt levels cautiously. A banker pointed out that the trend among banks to lend has not met expectations, with a notable drop when comparing current figures with the previous year. In the context of these figures, a mere Rs273 billion was extended in loans to the private sector at the same time last year. The SBP's reflection on the state of lending points out that banks are facing pressures that compel them to park liquidity outside of their own reserves. This action comes as an attempt to dodge a 15% incremental tax imposed for failing to meet the required 50% Advance-to-Deposit Ratio limit. Consequently, banks are acting conservatively, which directly impacts lending activities to the private sector, hindering economic growth. Overall, the implications of these actions underscore a widespread concern about economic performance, evidenced through faltering Large-Scale Manufacturing (LSM) figures and a forecasted low GDP growth rate of 2.5%. The LSM has seen troubling trends, including a substantial shrinkage of 10.3% in 2022-23, and ludicrously low growth of just 0.92% in 2023-24. This worrying cycle further perpetuates a low growth environment that has significant effects on the broader economy, leading to stagnation in key sectors, including agriculture and services, highlighting a need for renewed strategies to stimulate private sector investment and borrowing in Pakistan.