Political and economic instability impact private sector’s debt retirement

KARACHI: Prolonged political and economic instability has shaken the confidence of the private sector in Pakistan, leading to a substantial increase in net debt retirement during the first quarter of FY24, soaring to Rs258 billion compared to a meager Rs697 million during the same period in the previous year.

According to Dawn.com, the data released by the State Bank of Pakistan (SBP) on Wednesday revealed a significant deceleration in private sector activity, typically regarded as a catalyst for economic growth.

According to media reports, the abrupt decline in economic growth, plummeting from 6 per cent in FY22 to a mere 0.3 per cent in FY23, underscores the loss of private sector confidence in the nation’s economic stability.

The scenario remains largely unchanged, with the World Bank forecasting a modest 1.7 per cent growth rate for the current fiscal year, underscoring the diminishing role of the private sector in driving economic expansion.

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Meanwhile, the SBP’s data highlighted a widespread retreat from debt by the private sector across the entire banking system. Conventional banks, which extended Rs167 billion during the first quarter of FY23, reported a net debt retirement of Rs155 billion in 1QFY24.

The downturn began in FY23, characterised by limited bank lending to the private sector, effectively stagnating economic growth. Credit extended by conventional banks during the entire FY23 amounted to a meager Rs211 billion, a sharp contrast to the Rs1,612 billion recorded in FY22.

As per the reports, a senior banker commented, “Investor confidence has hit rock bottom due to political uncertainty and the nation’s fragile economic health. Unprecedented inflation, coupled with soaring electricity and petroleum prices, has further weakened the manufacturing and services sectors.”

The banker added, “Borrowing costs have surged by over 100 per cent in the past eighteen months, making it increasingly challenging for stakeholders to undertake new ventures.”

Large-Scale Manufacturing (LSM) experienced a stark decline of 10.26 per cent in FY23, with a year-on-year negative growth rate of 1.09 percent reported in July FY24.

Islamic banks, which provided Rs126.5 billion to the private sector in FY23, reported a net debt retirement of Rs77.5 billion in the first quarter of the current fiscal year, compared to Rs17.5 billion during the same period in the previous fiscal year.

Islamic branches of conventional banks struggled in FY23, with the latest data indicating a net retirement of Rs25 billion compared to Rs151 billion in the same period the previous fiscal year. Total debt retirement for the entire FY23 reached Rs86.4 billion.

Government Turns to Borrowing

Meanwhile, in response to these economic challenges, the government has increased its borrowing for budgetary support, raising Rs1,358 billion during the first quarter of FY24, compared to Rs525 billion in the same quarter last year, in an effort to bridge the fiscal gap.

The International Monetary Fund (IMF) has persistently called on the government to reduce the fiscal deficit, prompting efforts to enhance revenue generation.