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KIBOR hits 13-year high, weighs on credit growth

April 27, 2022

KARACHI: The six-month KIBOR (Karachi Interbank Offered Rate), a benchmark for lending to consumers and businesses, hit a 13-year high on Tuesday as surging borrowing costs raised risks of credit growth and economic contraction.

The KIBOR clocked in at 14.1 percent, the highest since February 2009, data from Arif Habib Limited, a brokerage house, showed.

The six-month KIBOR has jumped by 641 basis points so far in this fiscal year. It stood at 7.69 percent in the previous year ended on June 30, 2021.

The changes in KIBOR and thus the borrowing cost for consumers and businesses influence decisions of the public to consume, save, or invest.

“KIBOR is rising because of growing credit risk in the market, given the macroeconomic situation,” said Mustafa Mustansir, the head of research at Taurus Securities Limited.

“Expensive loans will definitely reduce demand for bank credit especially in case of consumer loans, and loans to SMEs etc,” Mustansir added.

Private sector credit growth was vital for economic growth, Mustansir said and added that a slowdown in private sector lending should impact economic activity also.

The IMF forecasts Pakistan’s economic growth rate at four percent in the current fiscal year, lower than a 4.8 percent target set in the budget 2021-22.

Between July 01, 201 and April 15, 2022, banks lent Rs1.197 trillion to the private sector. That compared with Rs397.8 billion in the same period last year, according to State Bank of Pakistan (SBP) data.

The interbank lending rates are going up in tow with higher treasury bills’ yields as the central bank is strongly expected to increase interest rates further in coming months amid stubborn high inflation.

Treasury bills’ yields sharply rose on all tenors in the last auction held on April 20. The cut-off yield on three-month T-bill increased 70 basis points (bps) to 13.50 percent. The yield on the six-month paper was 13.85 percent, up 60 basis points from the previous auction and the yield on 12-month paper increased 55 basis points to 13.85 percent.

The increase in the T-bill rates is unlikely to attract investment from foreigners in the local currency debt securities. The rising dollar yields, weakening rupee, political uncertainty and deteriorating external sector don’t let foreign investors keep their investments high in the country’s fixed income market. However, the upward trend in the treasury bills’ yields indicates high and aggressive borrowing by the government to finance the rising budget deficit.

“The increase in KIBOR is mainly due to the inflationary outlook in the short-term,” said Tahir Abbas, the research head at Arif Habib Limited.

The resumption of the IMF programme would force the government to take tough measures including removal of petroleum and electricity subsidy, which would significantly mount inflationary pressures, Abbas warned.

The IMF and Pakistan have agreed that prompt action is needed to reverse the unfunded subsidies, which have slowed down the discussions for the seventh review of $6 billion EFF (Extended Fund Facility), according to the IMF’s latest statement. These measures mainly include the reversal of subsidies on power tariffs and fuel retail prices.

Analysts expect the withdrawal of subsidies will raise CPI (Consumer Price Index) inflation to 14-15 percent, making a case for a 100-150 basis points hike in interest rates stronger at the next monetary policy review due on May 23.

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