Lending to govt hits record high
Listen to article
At first glance, Pakistan's economy appears to be on the path to recovery, macro indicators are stabilising, and optimism is cautiously returning. But a closer look reveals that many of the country's deep-rooted structural problems remain unresolved. One such issue is the Investment-to-Deposit Ratio (IDR), which has now reached an all-time high of 103%, even exceeding total deposits.
This means that banks are channelling the bulk of their deposits into government securities, effectively crowding out the private sector, the true engine of sustainable economic growth. While this trend may bolster short-term bank profitability and fiscal financing, it raises serious concerns about the long-term health of the real economy, which depends on private sector credit to drive investment, innovation, and job creation.
Pakistan is bound by restrictions imposed by the International Monetary Fund (IMF), which prohibits the government from directly borrowing from the State Bank of Pakistan (SBP) through money printing. This measure is aimed at curbing unchecked monetary expansion, which fuels inflation and undermines economic stability.
In response, the government machinery, including the State Bank of Pakistan (SBP), has resorted to injecting massive liquidity into private banks through Open Market Operations (OMOs), recently reaching an unprecedented Rs14 trillion. This level of intervention is extraordinary, especially when compared to peer economies. The injected funds are then funnelled into government securities, creating a self-serving loop: banks earn risk-free profits by lending to the government, while the government avoids borrowing directly from the SBP. This cycle not only enriches a few without exposing them to market risks but also starves the real economy of credit, depriving millions of people and businesses of the economic opportunities they desperately need.
"As of June 2025, the Investment-to-Deposit Ratio (IDR) reached 103%, up 608bps YoY, indicating that banks have invested more than their total deposits — highlighting a tilt towards government papers rather than private sector lending," noted Deputy Head of Trading at Arif Habib Ltd, Ali Najib.
This means that banks have now invested more than their total deposits, a clear indication that they are increasingly favouring risk-free government securities over lending to the private sector. The trend underscores a cautious stance amid ongoing economic uncertainty.
During the same period, total deposits rose by 14.1% year-on-year to Rs35.5 trillion, while bank investments surged by 21.2% to Rs36.6 trillion. In contrast, advances increased by only 8.7%, reaching Rs13.5 trillion, indicating a slower pace of credit expansion. This divergence in growth has led to a decline in the Advance-to-Deposit Ratio (ADR) to 38.1%, down from 40.0% a year earlier and 39.8% in May 2025. The decline in ADR highlights banks' reluctance to lend aggressively, partly due to concerns about borrower creditworthiness, regulatory constraints, or a lack of demand from the private sector — but mainly due to the fact that when there is a safe avenue, why would anybody take the risk?
Looking ahead, the banking sector is expected to remain stable, according to AHL, supported by rising deposit inflows and strong earnings from government-backed investments. However, the continued preference for investment over lending could constrain private sector growth and job creation, unless broader macroeconomic stability and investor confidence are restored. Experts suggest that the central bank and policymakers may need to revisit regulatory and fiscal measures to encourage more balanced credit allocation across the economy.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Express Tribune
14 hours ago
- Express Tribune
Govt body proposes credit scheme for sick industries
Govt had set a budget of Rs10 billion for the current financial year to meet the demand of Petroleum Division for the provision of subsidy to the export-oriented industries. photo: file Listen to article A sub-body has proposed reviving the linked credit scheme for the restoration of sick industrial units and easing access to credit under the Pakistan Industrial Policy. The committee also proposed revival-linked credit schemes by introducing a sales tax duty-linked loan scheme and treating fresh lending for revival as a priority. A high-level meeting of the sub-committees on the restoration of sick industrial units and ease of access to credit was held on Friday under the chairmanship of Special Assistant to the Prime Minister (SAPM) Haroon Akhtar Khan. The SAPM emphasised that any industry failing to repay loans, closed for more than 12 months, inactive, or operating at less than 30% of its capacity is considered a sick unit. The committee proposed that the SBP should issue an easy framework for the revival of sick industrial units. This framework would include principal haircut options, tenor extension options, adjustments in interest rates, and easier access to fresh working capital. Additionally, banks would be given incentives and protection from audits for voluntarily participating in the restoration of sick units. The committee also recommended establishing an Industrial Revival Commission to classify sick industrial units, create tailored recovery plans, and ensure coordination for financial and regulatory support.
Express Tribune
14 hours ago
- Express Tribune
SBP injects over Rs1tr liquidity
Listen to article The State Bank of Pakistan (SBP) on Friday injected a total of Rs1.004 trillion into the banking system through dual open market operations (OMOs), using both conventional and Shariah-compliant instruments to manage liquidity. In the conventional reverse repo OMO, the SBP accepted Rs898 billion against bids of Rs1.098 trillion. This included Rs198 billion for the seven-day tenor at 11.04% and Rs700 billion for the 14-day tenor at 11.01% (partially allotted on a pro rata basis). Under the Shariah-compliant Mudarabah OMO, the central bank injected Rs106 billion, comprising Rs103 billion for the seven-day tenor and Rs3 billion for the 14-day tenor, both at a higher uniform rate of 11.13%. Furthermore, the Pakistani rupee continued its upward momentum against the US dollar, appreciating 0.03% in the inter-bank market. By the close of day's trading, the local currency settled at 282.47, up nine paisa from Thursday's close at 282.56. According to AKD Securities, the rupee strengthened for the third consecutive week against the greenback. Gold prices in Pakistan rose, mirroring gains in the international market, where US gold futures hit a record high amid uncertainty about whether country-specific US import tariffs would extend to the most commonly traded sizes of gold bars. Spot prices were little changed but remained on course for a weekly advance. In the domestic market, the price of gold per tola increased by Rs500 to settle at Rs362,700, according to the All Pakistan Sarafa Gems and Jewellers Association. The price of 10-gram gold rose by Rs428 to Rs310,956. The modest gain came a day after a sharp jump, when gold per tola surged by Rs2,900 on Thursday to close at Rs362,200, driven by strong safe-haven demand and a rally in global bullion prices. December US gold futures rose 1.1% to $3,491.30 per ounce as of 12:32 pm ET (1632 GMT) after hitting a record $3,534.10 earlier in the session, when the Financial Times first reported the news, according to Reuters. The spread between US gold futures and spot prices widened and stood at $91. Spot gold steadied at $3,399.91 per ounce, but was up 1% for the week. Washington may place the most widely traded gold bullion bars in the United States under country-specific import tariffs, according to a ruling on the US Customs and Border Protection service's website, which would be a major blow to global supply chains for the metal. Some gold refineries, including a large Swiss entity, have paused deliveries of bullion to the US due to uncertainty over whether country-specific US import tariffs will apply to their metal, two sources familiar with the matter told Reuters.
Express Tribune
14 hours ago
- Express Tribune
IMF social spending goal missed
Listen to article Pakistan narrowly missed the International Monetary Fund's (IMF) target to spend at least Rs2.86 trillion on improving poor health and education standards, as Sindh, Khyber- Pakhtunkhwa (K-P), and Punjab fell short of their commitments. Education spending appeared to be a low priority, despite one in four children being out of school and half of grade-five students unable to read grade-two Urdu stories. Against the target of Rs2.863 trillion, the federal and four provincial governments spent Rs2.84 trillion in the last fiscal year, missing the mark by Rs27 billion, according to government sources. Compared to the targets in the memorandums of understanding (MOUs) signed by all five governments, expenditures were Rs240 billion lower than commitments. Sindh, Khyber-Pakhtunkhwa, and Punjab missed their targets by wide margins, while the federal and Balochistan governments exceeded theirs. Poor administrative structures and low absorption capacity were cited as major reasons for the shortfall. The IMF set quarterly and annual ceilings to ensure health and education spending was not sacrificed for meeting other conditions such as cash surpluses and budget balances. In May, Pakistani authorities assured the IMF they would work to improve provincial capacity in these sectors. The IMF's staff report stated that Pakistan's health and education spending has declined since 2018. All governments had aimed for a modest increase in spending to 2.4% of GDP, but execution fell short, particularly in Sindh and Khyber-Pakhtunkhwa, due to absorption issues. The IMF's annual target was missed despite higher spending in the last quarter. Against a quarterly target of Rs713 billion, the five governments spent Rs937 billion in April-June, which was nearly one-third more than planned. However, this late surge failed to offset shortfalls from the first three quarters. Authorities had acknowledged the decline in non-Benazir Income Support Programme (BISP) health and education spending in recent years and committed to gradually increasing it as a share of GDP over the three-year IMF programme. Compared to internal budgetary targets, the federal government spent Rs261 billion on health and education against a Rs248 billion target. Punjab fell Rs35 billion short, spending Rs1.15 trillion in total. Provincial Information Minister Azma Bukhari said Punjab's health budget was Rs524.8 billion, with Rs505 billion actually spent — 96% of the target. Education spending was targeted at Rs664 billion but stood at Rs649 billion, or 98% of the goal. Sindh, under the government of Chief Minister Syed Murad Ali Shah, fell Rs153 billion short, spending Rs670 billion against a target of Rs853 billion, said the sources. Provincial governments often favour large infrastructure projects with more visibility to voters over softer social spending targets. Khyber-Pakhtunkhwa spent Rs545 billion on health and education compared to the Rs600 billion target, missing by Rs55 billion. Balochistan, however, exceeded its target by Rs25 billion, spending Rs206 billion. A recent World Bank report for the "Actions to Strengthen Performance for Inclusive and Responsive Education" programme said Pakistan still struggles with equitable access to education, with significant disparities across levels and genders. The gross intake ratio in grade one is 91%, with disparities between males and females. Transition rates from primary to middle school are 83%, and from middle to secondary school, 92%, according to the World Bank. However, the gross enrollment rate drops sharply from 78% at primary level to 22% in higher secondary education, highlighting retention issues. Out-of-school children remain a major concern, with 26.1 million, or 38% of the school-age population, not attending school in 2022-23. Gender disparities worsen at higher education levels, and rural areas are hardest hit, accounting for 74% of out-of-school children. For girls, lack of access is a critical barrier. Despite progress in enrolment, earning outcomes remain low, with national assessments showing a decline in foundational literacy and numeracy (FLN). In 2023, only 50% of grade-five students could read a grade-two story in Urdu or Sindhi, down from 55% in 2021. English literacy also slipped, with just 54% of grade-five students able to read simple sentences, compared to 56% in 2021. Numeracy skills also worsened. World Bank publications on health sector loans show a similarly troubling picture. Although Pakistan has seen improvements in health outcomes over the past decade, it is unlikely to meet most 2030 health-related Sustainable Development Goals (SDGs) at the current pace. Life expectancy has improved but remains among the lowest in South Asia. Progress in reproductive, maternal, and child health is also inadequate, and Pakistan remains one of only two countries where polio is endemic.
