A declining trend

According to figures released by the State bank of Pakistan, bank credit to the private after rising for some time is now showing a declining trend. Details show that private sector credit declined from 748 billion rupees last year to 601 billion rupees in the current fiscal year. This is in direction contradiction to the tall claims of the previous PML-N government about allround progress in all sectors of the economy. These claims included the growth rates of Gross Domestic Product (GDP) of 6 percent compared to the previous year's 5.4 percent, private investment of 5.2 percent in contrast to 2016-17's 7 percent, and large-scale manufacturing (LSM) sector of 6.13 percent against the previous year's 5.62 percent. But the realities on the ground have been different as u[held by the information given by the Pakistan Bureau of Statistics showing a decline in private investment of 1.8 percent between the current and the year before.

The reduction in credit to the private sector is surprising in view of the policy decision by the former elected government to reduce interest rates with the sole objective of encouraging higher credit to the private sector considered as the engine of growth of the economy. This policy was followed in spite of contrary advice given by international donor agencies, including the World Bank and the International Monetary Fund. In its 6 March 2018 first post-programme monitoring report, the IMF said that "despite the recent interest rate hike, the monetary policy stance has been largely accommodative, with the real policy rate below its historical average, contributing to strong credit and domestic demand growth. Staff recommended further tightening of the monetary policy to slow domestic demand and import growth, strengthen demand for rupee financial assets, and mitigate the potential pass through from the exchange rate adjustment to inflation."

As experts point out, private sector borrowing is determined and directed by the prevailing interest rate as well as the business environment in the country. In this context, it is relevant to note that during the IMF's three-year (September 2013-16) Extended Fund Facility programme, the government prepared a business climate reform programme with the Fund urging the government to begin implementation. In the eleventh quarterly mandatory IMF review in 2016, the Fund acknowledged that "a new countrywide business climate reform strategy was adopted in February 2016, defining specific time-bound measures at the federal and provincial levels to streamline procedures and strengthen the regulatory framework across 10 priority areas," including setting up a virtual one-stop shop for new firms, paying taxes, contract enforcement, improved access to credit for micro, small and medium enterprises and trading across borders. However, implementation remains in poor shape to this day as reflected by Pakistan's poor ranking in the world index of ease of doing business.

Some pluses on the economic front are evident. No doubt, the law and order situation in the country has improved considerably in recent years but the situation needs to further improve. In addition, the private sector remains hostage to several impediments, including utilities' tariffs that are higher than those prevalent in other countries of the region, delays in tax refunds that continue to undermine the liquidity of productive sectors, and bureaucratic red-tape that is a big impediment in the growth of productivity. In a nutshell, a decline in private sector borrowing is an indicator of the business community's lack of confidence in the prevailing business environment. Urgent corrective measures are needed to encourage the private sector which plays a vital role in the growth of the economy.