Slow credit expansion making growth govt centric

PRIVATE sector credit has marked a sharp decline this year compared to last year as per a recent news report. It said credit growth fell to 15.20 percent in October this year from 15.34 percent in the same month in 2015. The comparison is based on import bills of actual machinery and industrial raw materials; which suggests a sluggish private sector activities. The slow down in credit flow to private sector comes as a paradox at a time when the government claims that growth is increasing steadily making the claims partly controversial.
 
The truth may be that more economic growth is now taking place based on government public expenditure where the bigger part of the budget is going to pay salary and allowances to government employees. Otherwise it may be said that we are now having a public expenditure led economic growth where private sector’s contribution is on decline.

Experts said stagnant business situation is very much responsible for the decline of private sector credit. It then suggests lower private sector investment in business, which in turn is a slow down to create new jobs and other income generation activities. It appears that the business sector is yet to overcome from the dull situation of earlier political turmoil and prevailing uncertainty factors. It is also visible from loan operations of public and private banks. High interest rates marred with risky business environment is still discouraging businessmen to take loans and make investment in a big way. In many cases investors are surrendering their loans to avoid risks. In fact businessmen are facing two major problems such as high interest rates in an unfriendly business environment. Without good investment climate they fear trouble and this is what slowly pulling back private sector credit.

Some estimates suggest credit flow to the private sector declined by a big margin in October this year compared to October last year. It was also noticeable for September loan figures this year compared to last years. The BB data showed L/C settlement against industrial imports registered a negative growth of 4.19 percent in October this year against the 11.10-percent growth in the corresponding month of 2015. Meanwhile, banks have instead disbursed loans aggressively to government mega-projects overshadowing credit growth in the private sector. Even the government failed to accelerate public-private partnership projects for executing mega-projects to make private sector co-sharer in big infrastructure projects.

In our view the government is making development activities more public funded now than private sector led growth. It is thus taxing people for mega-projects which private business could do taking bank loans to expand the base of the economy. We are afraid such policy may not be sustainable at the end.