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Pakistan hit by credit crunch, risks

Discussion in 'Pakistan Economy' started by Mumbai Man, Jul 11, 2011.

  1. Mumbai Man

    Mumbai Man BANNED

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    Pakistan hit by credit crunch, risks

    11 July 2011 Credit squeeze for the industry and business has hit the economy, growth is slow, inflation is ascendant and the balance of payments need to be watched against risks, warns the central bank.
    The State Bank of Pakistan, or SBP, in its Parliament-mandated report for the third quarter of FY-2011 reviews the economy, and projects the future prospects. It does not paint a rosy picture of the economy as of now, and the months ahead. It recommends strong remedial measures to put the economy, bank credit and the financial market back on track.

    The SBP also expresses “concern” over the energy crisis: “The energy shortages will continue to be binding constraint for the manufacturing growth, particularly for textiles, glass making and fertiliser units.” It emphasises the importance of using alternative sources of energy and “the need to rationalise tariffs for different users of natural gas and improve the gas pricing to incentivise further exploration and extraction.”

    “The growth of credit to the private sector was slightly lower at 3.4 per cent during July-May of FY-2011, compared to 3.6 per cent in the like period of FY-2010,” the SBP says. While, the credit squeeze goes on, “there is hardly any credit demand for new investment in the economy.”

    The working capital loans during July-April FY-2011 jumped to Rs144.7 billion — up from Rs47.4 billion in the like period of FY-2010. “The three-fold increase in demand in the working capital loans was due to the rise in raw material prices, especially of cotton, sugarcane and edible oil. Both textiles and sugarcane sectors accounted for 68.5 per cent of the rise in the working capital loans.”

    The surge in exports increased the demand for trade loans which increased by Rs68 billion during July-April 2011 — compared to Rs21 billion last year with 71.6 per cent credit growth for textiles. The fixed investment credit saw a nominal increase of Rs1.71 billion, against an expansion of Rs62 billion in the like period of FY-2010.

    GDP growth at factor cost was 2.4 per cent during the first eleven months of FY-2011, compared to 3.9 per cent in FY-2010. Agriculture inched up just 1.2 per cent, and services 4.1 per cent. Industry actually recorded a minus growth of 0.1 per cent while large scale manufacturing grew a meagre one per cent. Despite growing inflation and credit squeeze, the SBP continued its tight monetary policy, or TMP, with the benchmark discount rate at 14 per cent, leading to higher cost of bank credit.

    TMP and the government’s fiscal policies have failed to check inflation. The SBP admits, “inflation outlook is not very encouraging. Inflation has permeated into most sectors and will be difficult to curtain in the short run.”

    Oil prices increased by around 40 per cent at the beginning of FY-2011, and high prices of Palm oil are impacting cooking oil, although good wheat and sugar crops have brought down their prices, which “should contain food inflation. But SBP projects, consumer price index to rise by 14 per cent. “The outlook for overall inflation, even in the absence of food and energy shocks, is not very encouraging.”

    But, the SBP warns of “real risks of reversal in Pakistan’s external sector performance.” A reasonably good current account had saved the external accounts in FY-2010, but these appear fragile in the new FY-2012 that started July 1. The SBP is unsure of the home remittances — sent by overseas Pakistanis, including those from the UAE, Saudi Arabia, the Gulf, the UK and the US — will continue to grow, while high prices of imported oil, commodities, industrial inputs and food are adversely impacting the import bill. FDI inflows are at a fourth of what these were two years ago while there are uncertainties over foreign bilateral and multilateral aid inflows. But Pakistan now has forex reserves of $17.2 billion, home remittances are estimated at $11 billion, and net FDI $1.4 billion. Imports in first ten months of FY-2011 were up 4.7 per cent and exports 28.1 per cent.

    So, this is how the central bank looks at the prospects for the coming months.

    Pakistan hit by credit crunch, risks
     
  2. Mo12

    Mo12 SENIOR MEMBER

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    Im sure China will help them out.