Fall in lending, investment
The crash in investment will inevitably go beyond housing and hamper growth across the board
Uncertainty still dominates the financial sector as new reports show that private sector borrowing in the current fiscal year is down 71% compared to the same time last year. SBP data shows that the private sector borrowed Rs88.1 billion between July and November, compared to Rs394.8 billion in the same five-month period last year. The massive decline is being blamed on the key interest rate — 13.25% — because of which banks are charging interest rates of over 20% on some loans. The key rate last year was just 6.5%. The government increased it mainly as an anti-inflationary measure.
While there may be a valid debate on whether or not the change achieved its intended goal, the unintended consequences on investment have been dire. While borrowers are understandably worried, bankers themselves have noted that the higher interest rates have led to an increase in defaults. Conversely, banks themselves are investing in government securities, which are offering high returns. This also works out for the government, which has become more dependent on private banks for cash over the past few months. The government borrowed Rs1.37 trillion in just the first month of the new fiscal year against net debt retirement of over Rs20 billion during the same month last year.
Unfortunately, it doesn’t work out for the economy in general. Even those in the private sector who can pay high interest rates can’t borrow from banks because they are busy maximising their profits using risk-free government securities. This essentially amounts to making money off taxpayers who must pay off the ever-increasing debt. The unrealistic rates have had a harsh knock-on effect on the economy in general, and particularly industry, where output declined over 6% in the first four months of this year. Even construction, one of the few ‘recession-proof’ industries in the country, has seen a 97% decline in foreign investment.
No, that is not a typo. The crash in investment will inevitably go beyond housing and hamper growth across the board unless a solution is found quickly.
Published in The Express Tribune, December 25th, 2019.
While there may be a valid debate on whether or not the change achieved its intended goal, the unintended consequences on investment have been dire. While borrowers are understandably worried, bankers themselves have noted that the higher interest rates have led to an increase in defaults. Conversely, banks themselves are investing in government securities, which are offering high returns. This also works out for the government, which has become more dependent on private banks for cash over the past few months. The government borrowed Rs1.37 trillion in just the first month of the new fiscal year against net debt retirement of over Rs20 billion during the same month last year.
Unfortunately, it doesn’t work out for the economy in general. Even those in the private sector who can pay high interest rates can’t borrow from banks because they are busy maximising their profits using risk-free government securities. This essentially amounts to making money off taxpayers who must pay off the ever-increasing debt. The unrealistic rates have had a harsh knock-on effect on the economy in general, and particularly industry, where output declined over 6% in the first four months of this year. Even construction, one of the few ‘recession-proof’ industries in the country, has seen a 97% decline in foreign investment.
No, that is not a typo. The crash in investment will inevitably go beyond housing and hamper growth across the board unless a solution is found quickly.
Published in The Express Tribune, December 25th, 2019.