KARACHI: The private sector credit-to-GDP ratio in Pakistan is not only the lowest in the region but it has been facing a steep decline, said the annual report of the State Bank issued on Friday.
The overall credit allocation is heavily concentrated in the manufacturing sector and in a few large size borrowers.
The credit to private sector, however, could expand by Rs208.7 billion in FY15, compared to Rs371.4bn in the previous year, the report notes.
The report added: ‘Several factors explain this slowdown: (a) a sharp fall in commodity prices that reduced the demand for working capital and trade financing loans during the year; (b) non-price constraints (power shortages, and weak external demand); (c) a steeper decline in inflation than in lending rates that increased the real cost of borrowing; and (d) some sector specific developments like lower production of sugarcane.
The large borrowing needs of the government, along with sizeable OMO injections, provided commercial banks room to fund some of their investments in government papers using short-term liquidity from SBP.’
Banks were also eager to lock-in their funds in government securities in anticipation of further softening of interest rates. As a result, investment of commercial banks in government securities saw an increase of Rs1.4 trillion to reach an all time high of Rs 5.5tr by end-June FY15.
According to the report, in agriculture a better performance by the livestock sector (having 11.8 per cent share in GDP) pushed up the overall growth in FY15 to 2.9pc, marginally higher than 2.7pc growth last year.
The crop sector, on the other hand, faced multiple setbacks, such as the September 2014 floods, heavy rains in April 2015, and the decline in domestic prices of agriculture produce in tandem with the global trends
“Persistent low yields bring up concerns on long-term food security in the country, particularly when the prospects of increasing area under cultivation are limited; and growing population is pushing up the demand for food,” said the SBP report.
“Ensuring food sustainability becomes more challenging in the long term due to climate change and its looming threat on food and water security. In terms of water stress, the importance of more storage capacity, improved productivity and conservation cannot be overemphasized,” said the SBP.
The report said the industry could not perform well during FY15 despite some positive developments (steep decline in the global prices of minerals, metals and other industrial inputs; and robust growth in construction).
“A major slowdown was recorded in the LSM sector, which could grow by 3.3pc in FY15, compared to 4.1pc last year, and the target of 7pc.”
Effective from July 1, 2015, the government has introduced new surcharges that would bring power tariffs closer to the cost of generation. “In a sense, the new tariff transfers the bulk of cost of poor governance and inefficiency in the power sector to end-users,” the report said.
The transmission and distribution companies, on the other hand, have no incentive to improve their operations, even if they are privatised, it added.
The State Bank said that while capacity issues, administrative constraints and security concerns continue to impede development of the gas sector in Pakistan, the decline in wellhead prices in response to falling crude oil prices have further dampened the prospects of future gas exploration and production in the country.
“This is a concern as the proven gas reserves as well as annual gas production are already on the declining trajectory.
Slow pace of development in the hydro and alternate energy resources are likely to increase Pakistan’s future energy dependence on costly foreign resources,” said the report.