Qudsia Bano

In the fiscal year 2022-23, Pakistan's economic landscape witnessed significant challenges as government borrowing soared, leading to a credit squeeze in the private sector and mounting liquidity pressures. The key driving force behind these developments was the increased reliance on commercial banks to finance a substantial fiscal deficit. The data reveals a substantial rise in Net Domestic Assets (NDA) of the banking system, propelled by heightened government borrowing from commercial banks. This surge was not only attributed to the fiscal deficit but also to borrowing by public sector enterprises (PSEs), particularly in the power sector. Settlements of circular debt-related payments and increased financing under commodity operations triggered by a rise in the wheat support price, further contributed to the surge in NDA.

The net increase in credit to the private sector was a mere Rs31 billion in FY23, a stark contrast to the previous year's offtake of about Rs1,215 billion.Specifically, working capital loans experienced a net retirement, and the offtake in fixed investment loans slowed down, influenced by the deceleration in disbursements under the State Bank of Pakistan's (SBP) concessionary financing schemes in the second half of FY23. Consumer financing also saw a net retirement, driven by reduced demand for automobiles and their financing amid rising interest rates. The decline in credit demand was evident in the total number of loan applications received by banks, which decreased by 5.1% in FY23. While NDA experienced a remarkable surge, Net Foreign Assets (NFA) saw a contraction due to reduced external financial inflows, influenced by delays in the 9th review of the International Monetary Fund's short-term loan programme.

Despite this, the growth in NDA more than compensated for the contraction in NFA, leading to a substantial 14% growth in the M2 money supply. Asim Mustafa, Regional Head at Faysal Bank, Islamabad, said the rise in currency in circulation, coupled with substantial government borrowing and the net retirement of external debt exceeding Rs1 trillion, created liquidity pressures in the money market. In an interview with WealthPK, he said: “To address this, the State Bank of Pakistan significantly increased the frequency and volume of longer-tenor open market operations (OMOs) during FY23.” He said as the fiscal year unfolded, these economic dynamics highlight the need for strategic interventions to balance government borrowing, spur private sector credit, and manage liquidity challenges for sustained economic stability.

Credit: INP-WealthPk