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Assessing liquidity

In a recent seminar on Regional Economic Outlook, IMF country representative reportedly highlighted the importance of reviving private sector investment to boost growth. Looking at the latest data released by the State Bank of Pakistan, we observe that liquidity position is sequentially improving and private sector growth inching up. In contrast to the hoopla surrounding rising fiscal constraints – a point stressed in the recent monetary policy statement – in net terms the GoP has retired PkR50.4bn of its debt to scheduled banks during 1QCY10 (please see graph below). Concurrently, public sector lending as a % of total credit has declined to 23.1% as at end Mar’10 from 24% as at end-Dec’09. With private sector investment crowding out ebbing and asset quality pressures peaking, banks are gradually increasing credit outlays to the private sector, where private sector credit growth has averaged at 1%YoY in 1QCY10 as compared to average contraction of 5.1%YoY during 4QCY09. With interest rates likely to remain at their current levels in the medium term, the question arises whether improvement in financial sector liquidity position will be able to sustain the nascent recovery in private sector credit growth.                            

AKD Research
2 June 2010

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