KARACHI: After witnessing a steep increase in liquidity inflows during the first six and half months of the current fiscal year, the private sector repaid a staggering Rs440 billion to banks in just two weeks.

On Wednesday, the State Bank`s data showed that the money lent in the last quarter of 2024 started returning to the banks as the fear of a 15 per cent incremental tax on the advance-to-deposit ratio (ADR) is over.

From Jan 17 to 31, the credit to the private sector went down by Rs440bn from Rs1.398 trillion to Rs958bn.

One of the main reasons for the significant increase in advances to the private sector was the government`s announcement of imposing an incremental tax of up to 15pc on banks whose ADR falls below 50pc by Dec 31, 2024.

Some banking experts believe the massive decline in the policy rate was the key factor that pushed liquidity flow towards the private sector.

However, it proved wrong as the interest rate had been slashed by 1,000bps to 12pc in six intervals from 22pc in June 2024. The shrinking credit outflows to the private sector negated the perception of some bankers that cheaper money would attract more credit demand.

The private sector continues urging the government that higher interest rates and taxes hamper industrialisation and slow economic activities. Textile millers, the largest industrial sector, claim that the higher cost of doing business due to heavy taxation and costly inputs resulted in the closure of 40 spinning mills.

Independent economists say agriculture and LargeScale Manufacturing are showing negative growth, reflecting lower consumption of banking liquidity.

The conventional banks` lending to the private sector reached Rs722.6bn on Jan 17, which declined by over 50pc to Rs325bn.

The Islamic banks` lending declined by Rs66bn to Rs559.5bn on Jan 31 from Rs625.5bn on Jan 17.

However, the Islamic branches of conventional banks improved by Rs23.5bn to Rs73.5bn during this period. However, the lending size was much smaller than that of earlier records.

`It was a designed lending with the sole purpose of avoiding the tax. Banks achieved their targets by increasing their ADR up to 50pc, but the government finally increased tax on them by 5pc to 55pc,` said a senior banker.

This large lending of Rs1.39tr could not stimulate the private sector and the growth remained subdued during this period. Some analysts pinned no hope for higher economic growth due to this short-term lending, which has started shrinking.

`The opportunity is there for the private sector since the interest rate has come down 12pe, but political uncertainties, increased terrorism and poor internet services are the key hurdles discouraging fresh investment,` said the banker.