- By devouring bulk of bank funds, the state leaves little for private sector
- Unless this imbalance is corrected, Pakistan will remain trapped in low growth and debt
Pakistan’s commercial banks should be the lifeline of its economy, channeling savings into investment, fueling businesses, and supporting farmers. Instead, they have been reduced to the role of financiers for the government’s chronic fiscal mismanagement. Bulk of banks’ available funds are being consumed by government borrowing. This financial gluttony is not only distorting Pakistan’s credit markets, it is suffocating the sectors that hold the key to growth.
Safe Addiction
For commercial banks, lending to the government is the easiest and most lucrative imaginable business model. Treasury bills and Pakistan Investment Bonds are considered risk-free. These instruments guarantee handsome returns with zero default risk and require no elaborate credit assessments, monitoring, or recovery headaches.
As against this lending to commercial borrowers is riddled with risks: defaults, non-performing loans, and the administrative cost of managing hundreds of borrowers. Agriculture lending in particular is viewed as unattractive—low margins, high risks, and difficult recoveries. Faced with this trade-off, banks have unsurprisingly shifted their balance sheets almost entirely toward government securities.
The outcome is, instead of being engines of growth, banks have become extensions of the Ministry of Finance. They thrive on the government’s debt binge while ignoring their responsibility to support enterprise and innovation.
Crowding Out
This government-first lending strategy has devastating consequences. By monopolizing bank funds, the state is crowding out private borrowers. Businesses — especially small and medium enterprises (SMEs) — struggle to access financing. When credit is available, it comes at prohibitively high interest rates. For farmers, the picture is even bleaker. Agriculture, which contributes nearly 20% of GDP and employs almost 40% of the workforce, receives only a tiny fraction of institutional credit.
Industrialists, exporters, and entrepreneurs all have the same complaint: banks would rather lend to the government than to those who actually create jobs and produce goods. This starves the economy of investment, depresses productivity, and erodes competitiveness in export markets.
Fiscal Indiscipline
At the core of this distortion lies the government’s fiscal weakness. Pakistan’s tax base remains pitifully narrow, unable to generate the revenues needed to cover mounting expenditures. Instead of reforming taxation or cutting waste, successive governments have opted for the easy route — borrowing from banks.
Each year, ambitious revenue targets fall short, while spending commitments balloon, particularly on debt servicing, defense, and subsidies. The gap is bridged by tapping commercial banks, which willingly oblige. What follows is a vicious cycle: domestic debt stocks swell, debt servicing consumes an even larger chunk of the budget, and new borrowing becomes inevitable.
This addiction to bank credit is not just a financial problem. It distorts economic priorities. Public development projects are delayed or shelved, social spending on health and education suffers, and inflationary pressures intensify. In effect, the state’s appetite for bank funds robs citizens of the services they deserve.
Macroeconomic Distortions
The consequences ripple across the economy. With government borrowing dominating the credit market, liquidity for the private sector dries up, driving up interest rates. High borrowing costs discourage investment and expansion, leaving factories underutilized and export potential untapped.
Inflation is another byproduct. Heavy reliance on domestic borrowing expands money supply, pushing prices upward. For ordinary citizens already reeling from shrinking purchasing power, this translates into daily hardship. At the same time, the government’s dependence on bank borrowing sends negative signals to international lenders and investors, who view it as a sign of weak fiscal discipline. Confidence erodes, foreign investment hesitates, and the cycle of economic stagnation deepens.
Missing Mandate
Pakistan’s banking sector, with its vast deposit base, could have been the backbone of industrial growth, entrepreneurship, and rural transformation. In other economies, banks are the drivers of innovation and industrialization. South Korea, Malaysia, and even Bangladesh created frameworks where banks actively supported private-sector expansion.
As against this, in Pakistan banks have been reduced to passive financiers of government deficits. By channeling bulk of their resources into sovereign debt, banks fail to nurture entrepreneurs, support exporters, and build new industries. The long-term cost of this misallocation is staggering — lost jobs, stunted innovation, and a perpetually underperforming economy.
Breaking Shekels
Escaping this trap requires bold action. The first and most urgent step is fiscal discipline. The government must reduce its borrowing needs by expanding the tax net, cutting wasteful expenditures, and restructuring its debt profile. Without addressing the root cause, any attempt to free up bank credit for the private sector will be futile.
Second, regulatory incentives must be realigned. Government securities will always remain part of banking portfolios, but they should not dominate to the extent of suffocating private lending. Prudential regulations should encourage banks to lend to priority sectors such as SMEs, agriculture, and exports. Credit guarantee schemes, risk-sharing facilities, and targeted refinance programs could help reduce banks’ reluctance.
Third, the State Bank of Pakistan must step up. While the central bank has often highlighted the dangers of crowding out in its reports, enforcement has been weak. Setting mandatory lending targets for priority sectors, backed by strict monitoring and penalties for non-compliance, could nudge banks toward more balanced portfolios.
No choice
The government’s credit gluttony is not merely a technical flaw — it is a structural stranglehold that suffocates Pakistan’s economy. By devouring bulk of bank funds, the state leaves little for the private sector, the engine of sustainable development. Unless this imbalance is corrected, Pakistan will remain stuck in a low-growth, high-debt trap.
Banks must rediscover their purpose — to finance enterprise, innovation, and the future. And the government must wean itself off its easy addiction to bank credit. The choice is stark — either continue on the path of fiscal indiscipline and economic stagnation, or build a banking system that serves the people, not just the treasury.