Banks Favor State Debt Amid High Returns, Survey Warns of Growth Risks
KARACHI:
The Pakistan Economic Survey 2024-25 has flagged a structural imbalance in the country’s financial sector, where commercial banks continue to favor lending to the government over the private sector due to the high returns and low risk associated with government securities.
Throughout the fiscal year, banks leaned heavily towards investments in treasury bills and Pakistan Investment Bonds (PIBs), encouraged by a historically high policy rate of 21%, maintained for much of FY24 to tame inflation. This made sovereign debt instruments highly lucrative and shifted banks’ portfolios further away from private-sector credit.
The report reveals that the government primarily relied on long-term borrowing, issuing PIBs and Sukuk to meet fiscal needs. It also introduced a new two-year, zero-coupon bond, raising Rs610 billion, while retiring Rs2.4 trillion in treasury bills. These efforts extended the average maturity of domestic debt from 2.9 to 3.5 years, helping improve debt sustainability.
Auctions for domestic debt witnessed robust participation:
- Treasury Bills: Bids worth Rs28.23 trillion (Rs9.47 trillion accepted)
- PIBs: Rs23.54 trillion (Rs9.68 trillion accepted)
- Sukuk: Rs4.88 trillion (Rs1.56 trillion accepted)
The government adopted a cautious acceptance approach to manage borrowing costs and rollover risk.
Meanwhile, private sector credit remained sluggish. High interest rates, economic uncertainty, and import restrictions discouraged borrowing by businesses. The survey notes that real credit growth to the private sector was either stagnant or negative after adjusting for inflation—underscoring limited access to affordable financing.
As the government’s borrowing needs stayed elevated due to the fiscal deficit and mounting debt servicing, banks found it safer and more profitable to invest in government debt. This created a “crowding out” effect, squeezing credit availability for productive sectors like SMEs, agriculture, and exports, which are crucial for sustainable economic development.
To counterbalance this trend, the State Bank of Pakistan (SBP) introduced several targeted lending schemes, such as:
- Export Finance Scheme (EFS)
- Long-Term Financing Facility (LTFF)
- SME Asaan Finance (SAAF)
However, uptake remained limited due to high borrowing costs, economic volatility, and cautious lending behavior.
The Survey warns that unless conditions for private sector lending improve, goals like industrial modernization, technological advancement, and export competitiveness may remain unmet. The continued neglect of private-sector financing poses a serious long-term risk to the country’s economic growth.
On the financial inclusion front, the survey notes modest but promising progress. The microfinance sector saw its borrower base grow from 9.56 million in December 2023 to over 12.34 million by end-2024. Deposits surged from Rs597 billion to Rs732.9 billion, though average loan sizes dropped from Rs59,988 to Rs48,971, limiting potential economic uplift.
Branchless banking also gained ground, with active accounts rising 11% to 126.7 million and transactions increasing 38% to 5.4 billion. The total transaction value jumped 42% to Rs25.8 trillion, reflecting growing trust in digital finance.
Despite these gains, the survey notes that infrastructure gaps, low digital literacy, and limited trust in financial institutions continue to hinder broader financial inclusion—especially among women and rural communities.
The report concludes by emphasizing the need for coordinated fiscal, monetary, and structural reforms to rebalance the credit landscape, reduce public sector dependence on borrowing, and unlock private sector potential for investment-led growth.
