ISLAMABAD (PEN) : In August 2024, lending from commercial banks to the Government of Pakistan soared to a staggering 100.83% of total deposits, as banks provided Rs31.03 trillion in loans, surpassing their total deposits of Rs30.78 trillion, according to the State Bank of Pakistan (SBP).
This surge has driven the investment-to-deposit ratio (IDR) to an all-time high, compared to 84.32% in August 2023, when banks lent Rs22.01 trillion against deposits of Rs26.11 trillion. The rapid increase in government borrowing has raised concerns, particularly as commercial banks also borrowed a record Rs12 trillion from the SBP to manage their liquidity.
These funds have been crucial for meeting the government’s financial needs, as well as providing credit to the private sector and serving retail and commercial customers. In August 2024, total bank deposits increased by 18%, reaching Rs30.78 trillion, largely due to a strong inflow of workers’ remittances, with expatriates sending additional funds back home to support their families.
Banks have been benefiting from borrowing from the SBP at lower rates and lending to the government at higher rates, capitalizing on these risk-free returns. However, lending to the private sector has seen a significant decline, with the advance-to-deposit ratio (ADR) dropping to 38.36% (Rs11.80 trillion) in August 2024, down from 45.09% a year earlier.
This drop raises concerns for banks, as the Federal Board of Revenue (FBR) has warned that if they fail to achieve an ADR of 50% by the end of December 2024, they may face additional taxation of up to 16%.
The government’s increased borrowing stems from lower-than-expected tax revenues, which has led to a greater reliance on loans to cover the fiscal deficit. In June 2024, borrowing from the SBP through open market operations (OMOs) hit a historic high of Rs12 trillion. OMOs allow central banks to inject liquidity into the banking system by purchasing government securities, ensuring banks have the necessary funds to meet government borrowing demands.
It’s worth noting that direct borrowing from the SBP by the government is restricted under IMF guidelines, highlighting the delicate balance the government must maintain in managing its finances. This situation illustrates the ongoing challenges faced by the economy and the vital role of the banking sector in navigating these turbulent waters.