Private sector borrowing rises despite rate hike

Loans taken by private businesses tick up 3% to Rs6.05tr in Nov

KARACHI:

Many businesses from the private sector made hefty borrowing during November 2021, suggesting that economic activities are growing despite a notable surge in the benchmark interest rate.

Businesses dealing in petroleum crude, cotton textile, other textile products, rice and paddy, machinery imports, grocery items and spices made significant borrowing in November compared to October.

Besides, other businesses such as iron and steel, cement, raw cotton, synthetic fabric and readymade garments also continued to borrow more from banks, however, the growth in their outstanding loans remained sluggish on a month-on-month basis.

The overall loans taken by the private sector rose 3% (or Rs178 billion) to Rs6.05 trillion in November compared to Rs5.87 trillion in the prior month, according to data updated by the State Bank of Pakistan (SBP).

“The pace of growth in private sector borrowing at 3% is normal,” Arif Habib Limited Head of Research Tahir Abbas said while talking to The Express Tribune.

“A significant growth in borrowing by some of the sectors suggests that economic activities are recovering in Pakistan,” he said.

The borrowing made by petroleum crude businesses (oil and gas exploration companies) surged 9.5% (or Rs5 billion) to Rs127 billion in November compared to Rs122 billion in October, according to the central bank.

Businesses related to oil and gas exploration and marketing reported higher profits after crude oil prices jumped to multi-year highs at $86-87 per barrel in the international market.

“Uptick in international oil prices may have encouraged local petroleum crude businesses to enhance borrowing from banks to increase production,” the analyst commented.

Loans taken by the cotton textile and other textile segments rose 11% and 7.6% respectively on a month-on-month basis to Rs190 billion and Rs177.4 billion in November, said the central bank.

Abbas said that textile was the best performing sector of Pakistan as it had been receiving significant export orders since the Covid-19 peaked in competing countries, which included China, India and Bangladesh. Accordingly, it increased borrowing from banks to meet the export orders.

Similarly, the loans taken by raw cotton businesses inched up 2% (or Rs3 billion) to an outstanding amount of Rs150.6 billion in November after domestic cotton production spiked in the month.

Cotton production grew 44% to 7.2 million bales of 155kg by mid- December 2021.

Loans taken by businesses dealing in rice and paddy soared 24% (or Rs19.2 billion) to nearly Rs100 billion in November.

“The growth in borrowing by rice and paddy dealers is seasonal as they settle their crops in the ongoing month every year,” the analyst said.

Borrowing for machinery increased 8% (or Rs4 billion) to almost Rs50 billion in November. “Businesses usually import machinery to expand production when economic activities are growing,” he said.

Bank lending to the grocery and spices segment spiked 31% (or Rs2.4 billion) to Rs10.2 billion in November compared to Rs7.8 billion in October, according to the SBP data.

The borrowing made by cement and steel manufacturers increased in the wake of ongoing construction activities in the country. However, the growth remained sluggish.

The central bank hiked the benchmark interest rate by 1.5 percentage points to 8.75% in November but the increase failed to slow the overall growth in borrowing by the private sector.

Later, it increased the rate by another one percentage point to 9.75% in mid-December 2021. The rise is aimed at controlling the high inflation and current account deficit.

Published in The Express Tribune, December 23^rd, 2021.

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