Private lending collapse

Bank lending to the private sector has crashed by 90% this year, illustrating how investment and day-to-day credit-based operations have disappeared from the economy amid record inflation and unprecedented interest rates. Further complicating the situation is that the cash-strapped government has readily been borrowing to meet its needs, meaning that banks have had a willing borrower on hand, despite the collapse of private sector demand for loans.

Further illustrating this is the fact that lending by Islamic banks and the Islamic banking arms of conventional banks — which do not count the government as a major client — saw a smaller drop in private borrowing because they were more willing to incentivise private lending. However, an almost 50% drop for the Islamic finance sector is no laughing matter, and bodes poorly for the economy and any claims that recovery, let alone growth, is around the corner. This is because investment-based growth and contraction usually take time to become fully visible in other economic indicators, as the new cash must first be put to use, while in the case of falling investment, established businesses can usually manage dips for a while without compromising output, and the only short term impact is on expansionary activities.

Meanwhile, the continuing slide of foreign exchange availability is cutting off another potential source of investment for several industries, which will similarly hit overall growth by limiting the potential of otherwise profitable companies, many of which can also rely on the demand stability created by larger bulk orders from overseas. This is why many experts have already begun predicting an economic contraction this year. Although the government still claims the economy should grow by a marginal 0.8%, the IMF, World Bank and Asian Development Bank have downgraded their growth forecasts to about 0.5%, and less mainstream projections are showing contractions in excess of 1%. If these cycles are not broken, the number will continue to decline.

Published in The Express Tribune, May 31^st, 2023.

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