The policy rate of the Central Bank of Pakistan is the interest rate at which the State Bank of Pakistan (SBP) lends money to commercial banks. The policy rate is one of the main tools of monetary policy, which aims to control inflation, promote economic growth and maintain financial stability.

The policy rate of Pakistan has undergone significant changes in the past two years, reflecting the changing macroeconomic conditions and challenges faced by the country. According to the data, the policy rate rose from 9.75% in January 2022 to a multi-decade high of 16% in November 2022, to 22% in September 2023 where it stayed constant. The main reason for the sharp increase in the policy rate in 2022 was the surge in inflation, which reached an all-time high of 38% in May 2023. The inflationary pressures were driven by a combination of factors, such as rising global oil prices, depreciation of the Pakistani rupee, supply chain disruptions due to the COVID-19 pandemic, and expansionary fiscal policy. The SBP raised the policy rate aggressively to curb inflation expectations and anchor price stability.

The changes in the policy rate have had significant impacts on corporate businesses and the trends associated with it. Corporate credit is the amount of loans extended by banks and other financial institutions to businesses for various purposes, such as working capital, investment, trade and expansion. Corporate credit is influenced by both demand and supply factors, such as business confidence, profitability, interest rates, liquidity and risk appetite. On the other hand, taming inflation can create a more stable and conducive environment for businesses in the long run. Lower inflation reduces uncertainty, allowing companies to better plan their operations and make informed investment decisions. Additionally, lower inflation can lead to lower interest rates in the future, easing the debt burden on businesses.

The impact of the policy rate hike on corporate credit was negative, as it increased the cost of borrowing and reduced the profitability and liquidity of firms. According to the data by Tasdeeq Credit Bureau, the number of active corporate loans decreased from 294,020 in September 2022 to 96,090 in December 2023, a decrease of 67%. The sector-wise credit showed a downward trend, with manufacturing, services, agriculture, and construction sectors witnessing a decline in their credit share and amount.

The trends associated with corporate credit were also unfavorable, as the non-performing loans (NPLs) ratio increased, went from 874,727[1] in December 2021 to 1,009,961[2] in December 2023, indicating a deterioration in the asset quality and repayment capacity of borrowers. Moreover, the average loan size also decreased from PKR 40.53 billion in September 2023 to PKR 29.91 billion in December 2023, a decrease of 26%.

According to the data from Karandaaz Data Portal, value of outstanding corporate credit stood at PKR 34.71 trillion in September 2022, but then decreased to PKR 12.89 trillion in December 2023, reflecting the impact of higher interest rates on borrowing and demand to credit.

According to the State Bank of Pakistan half-yearly report, during the first half of the fiscal year 2023, agriculture credit disbursements saw a significant expansion of 31 percent, reaching PK 842 billion compared to PKR 640.8 billion in the corresponding period last year. A majority of these disbursements were in the form of productive loans for the agricultural sector, with the livestock and poultry segment in the non-farm sector following suit. The surge in productive loans can be attributed to the aftermath of floods, which led to an escalation in production costs and exacerbated the tight monetary conditions faced by farmers. Despite the impact of flood-related losses, loans in the second quarter of FY23 remained higher than those in the first quarter. In the non-farm sector, disbursements for the poultry sector increased by 28.8 percent, primarily driven by the escalating costs of inputs, such as poultry feed. Furthermore, the working capital loans to the textile sector saw reduction to PKR 137.3 billion during H1-FY23 from PKR 260.1 billion in the same period last year.  The positive trajectory observed in private sector credit during the preceding year encountered a slowdown in the first half of fiscal year 2023. The growth rate in loans extended to private sector businesses nearly halved, decreasing from 15.1 percent in the corresponding period of the previous year to 8.3 percent in the first half of FY23.

[1] https://www.sbp.org.pk/ecodata/NPL/2022/Mar.pdf

[2] https://www.sbp.org.pk/ecodata/NPL/2023/Dec.pdf