KARACHI: Credit off take in the outgoing fiscal year as of June 21 fell by 1.7 per cent to Rs607.5 billion compared to Rs618.2bn during the same period last year.

The off take during the fiscal year fell on the back of high policy rates. The State Bank of Pakistan (SBP) has raised key policy rates from 6.5pc in June, 2018 to 12.55pc in June.

Moreover, the government borrowing from the SBP also increased by record highs during the period under review increasing inflationary pressures on the economy.

The off take at the beginning of last financial year was much higher than the preceding year but disappointing economic situation along with the higher rates discouraged the private sector from borrowing additional funds during the later months.

The central bank had justified massive rate hikes throughout the fiscal year citing rising inflationary pressures.

The Consumer Price Index (CPI) has risen to 8.9pc in June from 5.2pc in June, 2018 due to a knock on effect from currency depreciation.

It seems highly likely that the central bank will have to raise interest rates further in the FY 2019-20 as it moves to rein in rising inflation – expected to fall in the range of 11-13pc in the next fiscal year.

However, the government also announced that it plans to stop borrowing from the central bank in the next fiscal year. But the move would mean the commercial banks’ money will pour into the government papers crowding out the private sector.

On the other hand, the government in the last Treasury bill auction held on June 19 managed to raise a meagre sum of Rs Rs3.76bn at a cut-off yield of 12.74pc against a target of Rs600bn .

The auction result clearly indicates the banks’ unwillingness to commit at existing rates as they expect the interest rate to rise further in the coming monetary policy announcements.

On the other hand, Pakistan Investment Bond (PIB) auction held on June 26 showed that the banks invested total Rs95.6bn while the yield on three-year, five-year and 10-year instruments were 13.69pc, 13.8pc and 13.7pc respectively.

Bankers are of the opinion that the government’s shift for borrowing from the central bank to commercial banks will likely result in banks making profits however this would hurt overall economic growth.

Published in Dawn, July 3rd , 2019