Growth is unlikely till…

Now that half a year has passed, all realize that the ongoing fiscal year will yield a growth rate of less than 3 per cent. The SBP has been seen faltering as the benchmarks show no signs of improvement, and the pure of the land continue to seek personal survival, in the race of the fittest. If more money is the solution to economy’s woes, why then, one wonders is the unit of sale, short on one hand and abundant on the other.
While it has been many a times highlighted that, banks in their aversion towards lending to the private sector, stand on an advances’ stock of about PKR 3tln since FY08, SBP data has enlisted in an increase of PKR 343bln in assets between Jul-Nov’11 in the way of humoring the government’s gluttony. Keeping these grievances aside for a time, if one were to constructively inspect which areas of the economy are hurting, the answer would not fall short of ‘all’. Beginning the analysis from a negative trickle down perspective, although the banking book of this consumer category is small, the default rate or the Non Performing Loans (NPLs) stood at about 18.6 per cent as of Sep-11. Most starkling is that individuals have defaulted on about 20 per cent of the credit card payments amongst other loans such as those obtained for mortgage, where NPLs stand at 28 per cent. Moreover, loans to consumers have declined by PKR 8bln since the beginning of FY12. Moving a step up, the next ‘less significant’ category in the list of advances, is the SME sector where the magnitude of decline is much steeper i.e. PKR 25bln. The NPLs for this segment stand at a much worrisome 35 per cent. Additionally, NPLs of the agriculture sector stand at about 21 per cent although a marginal increase in advances of PKR5bln has been realized during the first quarter. Thus, at the micro-rungs of the economy, some projections of a shrinking demand in addition to the supply deficit characteristic of the ongoing slow growth phase. Bringing into perspective the segment that really matters as the productive vanguard for economic growth, the corporate sector, registered NPLs equivalent to PKR 416bln, much higher than the increase of the banking assets. Specifically, the worst hit in the respective category are textiles with NPLs at 32 per cent, Cement 23 per cent, Automobile Industry 22 per cent, Sugar 14 per cent. The impact of the corporate sector’s inability to service debt can be understood through an often quoted statistic that the textile industry’s contribution to the GDP stands at 8 per cent. As a direct corollary, if the textile sector is unable to return one-third of its loans then its productivity should fall by a similar amountreflecting directly on the growth rate for the current year. Moreover, the production and financial risk of other sectors like cement is based on demand that is derived and determined by the level of construction, which is once again catalyzed by strong growth. By glancing at these numbers, even a layman would be able to tell that over coming the power and gas shortage is the only simple solution for taking the economy forward. Easy calculations reveal that, producing an additional 5000MW per month from oil-based power plants would cost PKR 2.5bln per month and PKR 30bln for the whole year. Thus, reasons for not immediately incurring this cost seem hideous from any angle one may choose to look through. Simultaneously, one can also breathe sighs of relief that the solution requires the government to spend only a fraction of the losses already being incurred.
Why is there reluctance then?

The writer is an economic researcher and freelance financial journalist