Islamabad, Feb 9: By December 2024, banks’ investments in government securities reached a staggering Rs26 trillion, making up 57.6% of Pakistan’s central government’s domestic debt. According to the latest data from the State Bank of Pakistan (SBP), this massive infusion of capital highlights the growing reliance on banks to finance the government and the record profits these banks earn from taxpayer money.
The government borrowing from banks is not new, but the scale of the investments has been increasing, with domestic debt from banks reaching new heights. The data reveals that banks have been earning substantial returns from these investments, with interest rates for government securities reaching as high as 22% in FY24, often exceeding the central bank’s policy rate. While these investments benefit the banks, they leave limited capacity for lending to the private sector, which is crucial for economic growth.
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In the second quarter of the fiscal year, to meet the government-mandated advance-to-deposit ratio (ADR) limit and avoid a 15% incremental tax, banks increased lending to the private sector, reaching approximately Rs1.3 trillion. However, this surge in lending was short-lived, as banks subsequently reduced their lending to maintain a higher ADR. To manage the pressure, banks also lent Rs1.3 trillion to non-banking financial institutions (NBFIs) in the form of short-term lending.
A significant portion of the banks’ investments has been directed toward long-term Pakistan Investment Bonds (PIBs), which accounted for Rs19.4 trillion of the total Rs26 trillion in government paper investments. Islamic bonds, or sukuk, also saw notable interest, attracting a total of Rs5.757 trillion, with banks investing Rs3.2 trillion. Market treasury bills (MTBs) drew Rs9.961 trillion, with banks investing Rs5.332 trillion and non-banks contributing Rs4.622 trillion.
This dominance of government securities by banks has raised concerns about the ability of Pakistan’s banking sector to stimulate the broader economy. Instead of supporting private sector growth, banks have been profiting from these government-backed investments, while the government uses taxpayer funds to pay high returns and retire its debt.
Financial experts suggest that the fiscal deficit for the current year will likely exceed estimates, with the Federal Board of Revenue (FBR) already falling short by Rs388 billion from its target. The federal budget deficit for 2024-25 is projected at Rs8,500 billion, up from Rs7,506 billion for 2023-24, which was revised to Rs8,388 billion. As government spending continues unchecked, the growing reliance on bank investments in government securities poses challenges for Pakistan’s long-term economic stability.
