THE State Bank has reduced borrowing cost by cutting its key policy rate. The purpose is to revive private investment to ‘break the economy out of its slow-growth mode’ in which it finds stuck for five years now.

But financial analysts see little likelihood of banks starting lending their money to private businesses in the near future. The banks’ major customer - the government - very much remains in the market with a large appetite for their funds to support its budget, says a financial market analyst working for a brokerage house.

The central bank has itself acknowledged in its last monetary policy statement that risk-free investment in government papers will continue to attract the scheduled banks. It is in spite of deceleration in growth of non-performing loans (NPLs).

The private businesses too don’t appear much enthusiastic about borrowing for long term-investment for a variety of reasons: the credit cost still remains quite high, energy shortages continue to affect production, political uncertainty is rising ahead of new election and security conditions are deteriorating.

So how to break out of the ‘high inflation and low growth equilibrium’? The central bank will have to go beyond cutting the credit costs to help the economy break out of the slow-growth mode, says the financial analyst. “The decrease in the borrowing cost is a good move, and we hope that the monetary easing will continue going forward. Still it will be naive to expect the risk-averse banks to immediately divert their funds from government securities to the private sector,” he argues.

The government and the central bank will have to come up with an alternative strategy to provide funds to private businesses for long- term investment in capacity expansion and technology up-gradation, he insists.

Though the net flow of private sector credit grew by 7.5 per cent during the last fiscal to Rs235bn, highest net flow of credit to the private sector in a year since 2007/08, from a year earlier, the net flow of credit to private businesses fell to a meagre Rs18.3bn from Rs173bn during the previous fiscal. The remaining funds of Rs121bn were availed by the non-bank finance companies, again for investing in government bills.

“Not only the amount disbursed to private sector businesses was small but the retirements from them were also unusually high,” according to the SBP. The private businesses were disbursed Rs205bn and they retired Rs187bn compared to disbursement of Rs268bn and retirement of Rs95bn a year earlier.

“If it becomes a trend then the prospects of sustainable medium-term economic growth are very dim,” warns the SBP. The dissection of the dismal flow of credit to the private businesses shows that only Rs98bn were availed in the first half of last financial year and were completely retired in the second half.

Credit for fixed investments, nevertheless, showed a modest growth as a net flow of Rs31bn in the second half of the year was recorded compared to a decline of Rs12.4bn in the first half. Yet this modest credit uptake was limited to agriculture, food products and beverages, and transport, storage and communications.

The monetary policy statement says the main factors that have dampened the demand for credit by private businesses are persistent energy shortages, security concerns and challenging political environment. At the same time, the scheduled banks continue to prefer government over the private sector despite an improvement in the currency to deposit ratio (CDR) and a considerable deceleration in growth of NPLs.

All Pakistan Textile Mills Association  Chairman Mohsin Aziz suggests the establishment of a Rs500bn fund to finance long-term investment needs of industry. “These funds should be given to whosoever wants credit to set up new projects and modernise, renovate and expand capacity of the existing ones,” he says. He says the loans should be given at subsidised rate of five per cent for a period of 10 years.

He says the energy shortages and the high cost of borrowing have made Pakistani exports uncompetitive in the world markets.

“The industry, especially textile manufacturers, is ready to invest in expansion and technology up-gradation. But it is not possible for any one to do so at the existing cost of credit. The government and the State Bank must act swiftly to allocate subsidised funds for long-term investment,” he says. Business leader Gohar Ejaz says the banks are not prepared to help the industry meet their long-term investment requirements and the State Bank should step in to provide long term funds. “The industry will not take more than two years to use Rs500 billion,” he says, adding the total interest rate subsidy will not exceed Rs125 billion over a period of 10 years or Rs12.5 billion annually.

“This is a very small cost to be paid compared to its economic benefits. The investment will push growth in the medium-term, create an estimated five million new jobs and raise textile exports by $5 billion a year,” says Gohar.

He says the textile industry –from ginning to finishing – needs to modernise, renovate, up-grade technology and expand capacity in view of Pakistan’s expected entry into GSP+ programme of the European Union and take advantage of the opportunity being created by China’s exit from the traditional textiles.

Additionally, he says, the government should also allow the entire industrial sector to import duty-free machinery for setting up coal-based captive power plant besides removing all kinds of taxes on electricity to be produced by them.

He says the total stock of long-term loans outstanding against the textile industry has come down to less than Rs100bn. “This shows that the industry, which invested $5 billion between 2002 and 2005 for expanding its capacity and doubling its exports to $10 billion, has not invested a single paisa in the last seven years. Now is time to revive long-term investment in the industrial sector for reviving growth, creating jobs for over 1.3 million young people entering the labour market every year and boosting exports,” Gohar argues.

Another businessman, who did not want to give his name, says the Pakistan People Party’s leadership is getting a golden opportunity to show to the world that it is pro-business and is serious about resolving the issues facing the economy. “You cannot imagine the kind of political dividends it will bring for the PPP in the upcoming election.”