Due to an uncertain scenario brought on by the ongoing political and economic volatility, the private sector is now forced to borrow expensive funds in order to operate their enterprises or plan growth due to the rising interest rate.
According to data from the State Bank of Pakistan (SBP), as the fiscal year’s end draws nearer, bank advances to the private sector have been falling.
In the first nine months of the current fiscal year, private sector borrowings decreased by 74.3% to Rs266.4 billion from Rs1,036.6 billion during the same time previous year.
The record interest rate wasn’t the only factor contributing to the sharp decline in loan off-take to the private sector; ongoing political and economic turmoil also played a role.
The current environment is full of hazards, according to bankers, and money never goes for risks.
It was evident during the most recent Treasury Bill auction on April 4 that banks prefer to store their liquidity in government assets in order to generate risk-free, high returns.
The aim was Rs900 billion, and the government chose Rs2.2 trillion, even though the maturity amount was significantly lower.
Banks have been heavily speculating in government-issued paper. Around Rs6 trillion in T-bills and more than Rs15 trillion have been invested so far in Pakistan Investment Bonds (PIBs).
On the direction of the IMF, the State Bank raised the policy rate by a record-breaking 300 basis points in March and 100 basis points in April.
The issue has gotten worse as a result of March’s historic 35.5 percent CPI-based inflation rate, which raised investment risk significantly.
Notwithstanding the tight IMF-required restrictions, the government is borrowing far more than the auction objective to cover its mounting expenses amid income deficits.
For bankers, it appears hard to invest expensive funds in profitable enterprises, especially in the aftermath of inflation that is still on the rise.