Financing to private sector jumps to 44% of deposits

Bank financing to businesses in the private sector surged nine percentage points in one month to 44% of deposits by October 25, 2024, as the government approached the Supreme Court to vacate a stay order granted by the Islamabad High Court (IHC) against a 15% additional tax on financial institutions in case they fail to meet the financing target of 50% on December 31, 2024.

Citing the State Bank of Pakistan's (SBP) weekly data, research houses reported on Wednesday that the advance-to-deposit ratio (ADR) had been at 39% at the end of September 2024. Topline Research reported that banks' advances to the private sector increased 11% to Rs13.4 trillion as of October 25, 2024. JS Global reported that banks' total deposits declined 3% to Rs30.5 trillion in October compared to September. The drop in deposits automatically improved the ADR by some percentage points.

Last week, the IHC temporarily barred the government from collecting the additional tax till it gives a final ruling. The court is scheduled to hold a hearing on December 3.

The federal government, which is facing a shortfall in tax collection as per the International Monetary Fund (IMF) targets, has approached the Supreme Court to get the IHC's interim order overruled.

The government has estimated revenue collection of around Rs100 billion from banks in terms of the additional tax. A tax firm projected the collection at Rs197 billion.

To recall, banks were offering credit to the private sector at Karachi Inter-bank Offered Rate (Kibor) minus 12%. Accordingly, the actual interest rate comes to around 3-4%.

Financial experts anticipated that banks would meet the target of 50% ADR on the given timeline of December 31, as they were offering financing to their sister companies and the trusted corporate clients to invest in asset management companies (AMCs) and mutual funds.

Banks were apparently lending to meet the target under an understanding that borrowers would return the funds in the first few days of calendar year 2025, as banks were to achieve the mandatory ADR only for one day, ie, on December 31, 2024 instead of an average ADR for the full year.

The Federal Board of Revenue (FBR) has said that it will start calculating the ADR on average for the full year from 2025 to encourage banks to extend financing to the private sector throughout the year and ramp up economic activities.

Rupee crosses 278 vs dollar

Pakistani currency crossed Rs278 against the US dollar in the inter-bank market after two months. According to the central bank, the local currency shed Rs0.09, hitting a two-month low at Rs278.04 against the greenback.

It was the third conservative day of downtick for the local currency. Cumulatively, it has depreciated Rs0.37 in three days.

In the open market, the currency decreased Rs0.11, closing at Rs278.99/$, according to the Exchange Companies Association of Pakistan.

The rupee is losing value apparently on the back of rising demand for dollars for import payments.

The currency markets have, however, ignored positive developments like the Asian Development Bank (ADB) would give $500 million in new financing to Pakistan. Besides, Azerbaijan has announced an investment of $3 billion in the country.