Bright economic future: EPBD for shifting resources away from banking returns to productive investments

Business Recorder

28-06-2025

ISLAMABAD: The Economic Policy and Business Development (EPBD) think tank has emphasised that Pakistan's economic future hinges on shifting financial resources away from guaranteed banking returns and towards productive investments.
The group warns that commercial banks have effectively abandoned business lending in favour of risk-free government securities, creating a credit-starved economy.
Established primarily by former caretaker Prime Minister Anwaar ul Haq Kakar and former caretaker Commerce Minister Gohar Ejaz, the EPBD in its comments on federal budget 2025-26, criticised the banking sector's overwhelming reliance on government debt. With the industry's Investment-to-Deposit Ratio (IDR) at 97.3 per cent, the think tank argued, almost no capital is left for working capital, industrial expansion, or technology upgrades.
'Pakistani businesses cannot compete, expand, or create jobs while banks earn guaranteed returns from government debt,' the EPBD said in a statement issued Friday. 'Meanwhile, regional economies with policy rates around 5.5 per cent and debt servicing burdens of 25 per cent are achieving 6 per cent growth through business-focused financial policies.'
The think tank challenged the government's rationale for maintaining high interest rates—namely, to curb Current Account Deficits (CAD). The EPBD said that recent data disproves this assumption, citing the 2021–22 CAD spike, which was largely driven by non-interest-sensitive imports such as COVID-19 vaccines ($3.2 billion), energy products ($15.6 billion), and smartphones ($1.7 billion). 'High interest rates had no impact on controlling these imports but significantly damaged domestic economic activity,' the statement added.
Pakistan currently allocates Rs7.197 trillion annually—46 per cent of federal expenditure—for debt servicing, much of which flows to banks as guaranteed returns. EPBD highlighted that 59 per cent of government debt (Rs25,758 billion) is in floating-rate instruments. A reduction in the policy rate from 11 per cent to six per cent would generate immediate savings on the majority of the debt stock.
The think tank criticized the government's decision to issue Rs 2 trillion in fixed Pakistan Investment Bonds (PIBs) at peak interest rates of 22 per cent during FY23–FY24, saying it unnecessarily locked in high returns for banks. Nonetheless, the EPBD estimates that Rs 3 trillion in annual savings remain possible by lowering the policy rate on floating debt.
With inflation now down to 4.5 per cent, the group argues that a 6 per cent policy rate would still offer positive real returns, while freeing up fiscal space to stimulate economic growth. 'This money could transform Pakistan's economy—reviving manufacturing, expanding industry, enabling technology investments, creating jobs, and developing SMEs,' the statement said. 'Instead, it guarantees banking sector profits while depriving businesses of financing.'
The EPBD also criticised banks for operating more as bond traders than business lenders. 'They contribute nothing to productive economic activity,' it said. 'Even Pakistan's remittance system channels Rs87 billion to banks for simple money transfers—funds that could otherwise support SME growth.'
The think tank stressed that businesses are not asking for subsidies but for a level playing field. Affordable financing would restore competitiveness with regional rivals, improve export potential, and enable widespread technology adoption. 'Manufacturing capacity exists but cannot grow. Exporters have potential but are shackled by high borrowing costs. SMEs could create jobs — if only they had access to credit.'
According to the EPBD, regional economies demonstrate that supportive financial policies lead to six per cent growth while maintaining fiscal balance. 'These countries prioritise productive investment over rent-seeking by financial institutions. Their policies fuel broad-based development rather than concentrated profits.'
In contrast, Pakistan's current fiscal model forces a binary choice: support economic growth or continue subsidising banking profits. 'The 11 per cent policy rate, coupled with Rs7.2 trillion in debt servicing, guarantees economic stagnation while our competitors build industrial strength,' it warned.
The EPBD concluded by urging the government to realign its fiscal and monetary policies with business development objectives. 'Pakistan's economic future depends on redirecting public resources from guaranteed returns for banks to productive investments that create employment, enhance competitiveness, and drive sustainable growth.'
Copyright Business Recorder, 2025