Islamabad, Oct 13: IMF Raises Alarms Over Pakistan’s Increasing Reliance on Banks and SBP for Liquidity Support. The State Bank of Pakistan (SBP), commercial banks, and the federal government have a “complex tripartite relationship.” concerning which the International Monetary Fund (IMF) has issued warnings.
G overnmentand commercial banks in its most recent report, “2024 Article IV Consultation and Request for an Extended Arrangement under The Extended Fund Facility.” This relationship between sovereigns and banks may result in regulatory difficulties, policy disagreements, and economic instability.
Due to the banking sector’s rising adoption of government debt due to limited access to external funding. Banks’ holdings of domestic government debt have increased to almost 60% of their assets, or more than three times the average for Emerging Market Economies.
Due to their small depositor base, the banks have mostly used liquidity supplied by the State Bank of Pakistan (SBP) through Open Market Operations (OMOs) to finance the government’s increased demand for funding. This has greatly crowded out private lending, as government credit is more alluring than the latter.
Furthermore, there is now a great deal of interdependence between the balance sheets of the three parties the central bank, commercial banks, and the sovereign (government). Because of this intricate three-way link, changes or decisions made in one area (such as banking, monetary policy, or fiscal policy) can have a significant impact on the entire economy.
Through its influence on the connections between policy rates, private lending, and private investment and consumption decisions, it also has a major impact on the strength of monetary policy transmission.IMF indicated that several steps are being taken to break this connection. The first step in containing and subsequently beginning to unwind the complex interdependencies is addressing the fiscal imbalances.
The management of cash and debt should optimize underutilized public sector cash levels and maintain equilibrium between bank investment inclinations and the government’s medium-term strategic goals. The authorities should, in particular, keep a careful eye on the state of the banking industry and have a backup plan ready in case something goes wrong.
