Growth of the private sector

During his budget speech, Finance Minister Ishaq Dar eloquently laid out a vision for the Pakistani economy in which the private sector would drive innovation and growth and be supported and regulated by a vigilant government. It is a vision we hope the minister will seek to make into a reality, because right now, his ministry is doing its very best to strangle private sector growth, by sucking the lifeblood of investment out of the economy.

Real economic growth requires capital investments, which, in turn, require financing sources. However, the largest source of financing in Pakistan, the commercial banking sector, has been captured by the government as a means to finance its deficits, which are so large that they have all but completely squeezed out the private sector from the borrowing market. The situation was particularly dire during the fiscal year that ended June 30, 2013, when private sector credit plummeted by over 95 per cent.

No economy can possibly grow in an environment like this, where the government is effectively leaving no room for investment in the future by the private sector and borrowing heavily to finance current consumption. As a nation, Pakistan is effectively mortgaging its future for what is not a particularly good life today.

There is only one way to end this unsustainable madness, which is for the government to get closer to balancing its budget. Government borrowing has grown so rapidly over the last five years that it now accounts for over half of all lending by the banking sector.

The country is running out of the time for the government to get its financial house in order. And the banking system’s fate is now so interconnected with that of the federal government’s that any failure of the government to pay the interest on its debts could result in a liquidity crisis that may well result in financial disaster for the whole country. Let us hope the government wakes up before then.

Published in The Express Tribune, July 9^th, 2013.

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