According to the State Bank of Pakistan (SBP) report, the credit to the private sector continued its downward trajectory in H1-FY20, as businesses continued to scale down their activities and increasingly resorted to internal financing. This trend was consistent with the subdued industrial production (largely LSM) and a broad-based fall in imports during the quarter. Notably, the entire offtake was driven through working capital loans; in case of fixed investment loans, net retirements by non-manufacturing sectors like construction, power and transport greater than offset the rise in manufacturing sectors’ loans.
Recently the State Bank of Pakistan (SBP) has cut the benchmark interest rate by 100 basis points to 8 percent to assist citizens, businesses and the economy fight against the coronavirus pandemic. This decision reflected the monetary policy committee’s view that the inflation outlook has enhanced additional in light of the recent cut in local fuel prices. The interest rate no doubt is a tool obtainable with SBP to create a balance between the rate of inflation and economic activities in Pakistan. It is also recorded that the coronavirus pandemic has created unique problems for monetary policy because of its non-economic origin and the temporary disruption of economic activity required to combat it. According to the SBP report, the rise in the stock of working capital loans in H1-FY20 was only a quarter of the rise observed in H1-FY19. This trend was showed both by lower offtake by textiles and rice processing sectors, also deleveraging by the sugar, petroleum refining and edible oil units.
In case of export-oriented sectors, the SBP’s experts also revealed that the lower bank financing despite visibly buoyant sectoral activity largely represents better liquidity situations this year because of higher export values in Pak rupee terms, and a relatively smoother release of tax refunds through Federal Board of Revenue (FBR). Due to these factors, companies were not keen on borrowing against the SBP’s concessional Export Finance Scheme (EFS). Borrowing under EFS in fact declined to Rs 42.5 billion in H1-FY20 from Rs 58.0 billion in H1-FY19. Meanwhile, some exporters opted for foreign currency financing for trade purposes, given that rates on this type of financing were close to those on EFS. Furthermore, as it turned out, exporters were more drawn towards this financing; probably firms not eligible for EFS led this behavior.
As for the sector that preferred to deleverage this year the sugar sector figured prominently by making heavy seasonal retirements. In contrast according to the report, oil refineries opted to deleverage to shield their profit margins from getting additional eroded by high financial charges in the current interest rate environment. The report also added that the finance cost has even exceeded the operational income for most of the listed refineries during Q2-FY20. It may be recalled that the refining sector is al ready facing serious cash flow constraints stemming from regulatory changes and import-led compression in the commercial transport activity in the country.
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Facing restrictions with respect to the use of furnace oil in thermal power generation, refineries continue to struggle with inventory build-up of furnace oil, which is constraining their operational activity. According to the State Bank of Pakistan (SBP) report, in case of fertilizer, the liquidity situation was relatively better this year, as the sector’s sales revenue was Rs 2.1 billion higher in H1-FY20 as against to the corresponding period previous year. In this regard, a strong urea offtake of 1.3 million metric tons in December 2019 played a crucial role in enhancing fertilizer sales. With this comfort, the sector marginally retired Rs 0.7 billion in H1-FY20, compared to borrowing Rs 22.1 billion last year.
The automobile assemblers in contrast raised their reliance on bank financing more. Struggling with unsold stocks that created cash flow constraints, auto assemblers borrowed heavily from banks to finance their operational activities. Before the current downtrend, this sector utilized to make little use of bank borrowing and chiefly financed its working capital from customers’ prepayments. Among non-manufacturing businesses, short-term borrowing through the power sector was noteworthy. The rise could largely be attributed to working capital requirement of a major IPP in Q2-FY20.
Another notable increase was registered in the transport sector, whose short-term borrowing grew by Rs 21.9 billion in H1-FY20 as against to Rs 11.2 billion previous year. SBP report also revealed that fixed investment loans slightly declined by Rs 0.8 billion in H1-FY20, compared to a rise of Rs 37.0 billion in the corresponding period last year, as net retirements in construction and power sectors greater than offset borrowings through manufacturing businesses, chiefly fertilizer and textile.
The report’s statistics also showed that textile companies enjoyed lucrative rates of 5 percent under the SBP’s Long Term Financing Facility (LTFF) for export-oriented projects. LTFF loans constituted almost 95 percent of the textile sector’s overall fixed investment borrowing in H1-FY20, as against to 77.5 percent previous year.
Conclusion
No doubt, COVID-19 has hit economic activities in Pakistan. The lower interest rate on outlook for low inflation would assist the economy to recover by 2-3 percent next fiscal year (FY21) as against to projected negative economic growth in range of 0.5-1.5 percent in the current fiscal year ending June 30, 2020. Together with the government’s proactive fiscal stimulus counting targeted support packages for low-income households, SMEs, and construction also assistance from the international community, these actions should assist ample cushion to growth and employment, while also maintaining financial stability in Pakistan.