Will Pakistan's economy collapse with private sector credit crashing 79% amid deepening economic crisis?

At a time when the inflation rate has soared, unemployment has gone up and the country is struggling with the lack of commodities of basic needs like wheat and flour, its private sector credit has plummeted significantly, pushing the country further toward economic collapse. The State Bank of Pakistan has said that the private sector credit has plunged by a staggering 79 per cent compared to the previous year. It means that the businesses have raised few or no loans to expand operations and create jobs. 

Pakistan economic crisis

If media reports are to be believed, businesses borrowed Rs 1.87 trillion from banks in the first half of the previous financial year. It was Rs 395 billion less than the borrowings in the current financial year. Despite the State Bank cutting interest rates to encourage borrowing, businesses have not come forward to take loans, which shows that the economy is going through a phase of stagnation.

Meanwhile, consumer demand in Pakistan has crashed as food prices have soared 30-40 percent at various points. Electricity and gas bills have doubled, tripled, or even quadrupled in some cases. The income gains of the people have been eaten by inflation, leading to a shrinking of their real purchasing power. The report also suggests that businesses have no reason to increase production as the demand for their goods has declined. If a middle-class household is maxing out its budget on food, rent, and keeping the lights on, they're not shopping for new appliances or clothes. So businesses hunker down rather than expanding, the article points out.

IMF slams Pakistan

An article published in 'The News International' says, "Then layer on the uncertainty. Political instability that never seems to end. IMF programmes that inevitably bring fresh tax hikes and utility price shocks. The constant threat of currency devaluation makes your import costs explode overnight. Try making a five-year business plan in that environment. Most business owners would rather pay down existing debt and sit on cash than take on new risks.”  It says further that banks are also facing problems due to the "previous waves of bad loans." The banks, therefore, prefer putting their funds in government securities where there is no risk instead of lending them to customers who do not have the capacity to repay.

The problems of the Pakistani economy can also be understood by the IMF's rebuke to the South Asian country. In a statement last month, the International Monetary Fund issued a stern critique of Pakistan’s fiscal governance and highlighted chronic weaknesses in financial management, accountability, and transparency. The world body also expressed dissatisfaction over Pakistan’s inability to manage public resources effectively and demanded urgent reforms to prevent political misuse of taxpayer money. It asked Pakistan to take decisive action within six months to strengthen cash management. 

(With input from IANS.)