Karachi banks lend record sums to Pakistan government as private sector credit dries up
KARACHI, Feb 27 : The Optimus Capital Management (OCM) revealed that commercial banks in Karachi are extending unprecedented loans to the government. The data indicates that in January, a staggering 93 percent of the funds raised were channeled to the government in the form of loans, characterized by high interest rates. Meanwhile, the private sector is experiencing a concerning stagnation in credit supply, with a consistent downward trajectory observed.
Moreover, January witnessed a notable decline in bank deposits, plummeting to 27.54 trillion rupees compared to December's 27.84 trillion rupees. According to Sana Tawfiq, an economist at Arif Habib Limited, this dip can be attributed to substantial withdrawals made by large depositors who had initially responded to the banks' requests for deposits in December.
The increasing reliance of the government on commercial banks is primarily attributed to a prolonged scarcity of external loans. Data reveals that banks have invested a significant portion, amounting to 25.60 trillion rupees, out of the total deposits in government loans through T-bills, Pakistani investment bonds, and sukuk. This investment-to-deposit ratio has surged to an unprecedented 93 percent, marking a stark contrast from 85 percent in January last year and 91 percent in December 2023.
The escalating fiscal deficit stands as the chief driver behind the government's heightened dependency on commercial banks. With interest rates soaring to 22 percent, projections suggest a potential surge in government debt from the current 8 trillion rupees during the ongoing financial year.
It's worth noting that a mere one percentage point increase in interest rates could lead to an annual escalation of interest payments ranging between 200 to 250 billion rupees. This trend underscores the challenges facing both the government and the banking sector in managing fiscal policies and sustaining economic stability.
