Investment in govt debt hits record
The parking of bank deposits in the safe-haven government debt securities hit a new high at 92% in November 2023, leaving very little financing for the private sector, which has remained the engine of economic growth.
According to State Bank of Pakistan’s (SBP) latest data on commercial bank deposits, investments and advances, the banks lent Rs24.58 trillion to the government through investment in debt securities like T-bills and Pakistan Investment Bonds (PIBs). The investment constituted around 92% of the total bank deposits of Rs26.79 trillion by the end of November.
Banks’ investment in sovereign papers grew 33% in the past one year to Rs24.58 trillion in November compared to Rs18.48 trillion in the same month of 2022.
Accordingly, the banks’ investment-to-deposit ratio (IDR) spiked 10.44 percentage points over one year to 91.7% in November compared to 81.3% in the corresponding month of last year.
design: Ibrahim Yahya
Talking to The Express Tribune, Arif Habib Limited Head of Research Tahir Abbas said a higher interest rate scenario discouraged the private sector from borrowing funds from banks to run their businesses. “This situation prompted banks to lend heavily to the cash-strapped government.”
He was of the view that it was no more feasible for industrialists and businessmen to borrow from banks at the prevailing high rate of 23-24% for initiating new projects like setting up factories and expanding the existing production lines.
The government, which relies heavily on domestic debt to run its day-to-day affairs, continuously borrows funds from banks despite a significantly high rate of return.
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It needs a consistent flow of financing to bear the rising cost of interest payments on debt, and pay monthly salaries and pensions to existing and retired employees. These constitute major current expenditures of the government.
Heavy borrowing from domestic banks has continued in the wake of comparatively lower revenue collection, though tax receipts rose sharply in the ongoing fiscal year.
The Federal Board of Revenue (FBR) surpassed the revenue collection target for the fifth consecutive month in November, amassing nearly Rs3.5 trillion and remaining on track to achieve the goal set by the International Monetary Fund (IMF).
Tax authorities collected Rs34 billion more than the target set for the July-November period of the current fiscal year on the back of an exceptionally healthy increase in direct taxes.
Abbas said the private sector was projected to return to banks for making fresh borrowing in the next calendar year when the central bank was expected to slash its policy rate by a total of seven percentage points to 15% by December 2024. The policy rate has stood at a record high of 22% since the end of June 2023.
At present, the private sector is largely repaying its old debt. Therefore, the banks’ advances to the private sector against deposits – the advances-to-deposit (ADR) ratio – shrank 4.15 percentage points to 44.6% in November compared to 48.8% in November 2022.
In absolute terms, the banks’ advances to the private sector rose almost 8% over the past one year to Rs11.96 trillion in November 2023 compared to Rs11.09 trillion in the same month of the previous year.
Central bank data suggests that bank deposits grew 18% in the past one year to Rs26.79 trillion in November, but the increase could not be translated into expansion of economic activities due to the piling up of debt to unsustainable levels.
Abbas, however, said the growth in deposits was well in line with the gradual turnaround in economic activities. Besides, a higher rate of return on deposits encouraged households to park their savings in banks.
“This has reduced the circulation of cash amid digitalisation of the economy and the financial sector.”
Bank deposits will continue to grow with a moderate economic growth that the central bank has projected at 2-3% for FY24.
Pakistan’s gross domestic product (GDP) grew 2.1% in the first quarter (Jul-Sept) of the current fiscal year compared to a contraction of 1% in the same quarter of last year.
Abbas pointed out that the remittances sent home by overseas Pakistanis were the largest source of growth in bank deposits as inflows were converted into Pakistani rupees and spent or parked in banks.
He projected that bank deposits, investments and advances would continue to move at the same pace in the short run.
He voiced hope that the central bank’s reliance on domestic borrowing would go down once inflows from multilateral and bilateral creditors picked up momentum.
Published in The Express Tribune, December 17th, 2023.
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