KARACHI: Holdings of government securities by banks and the corporate sector have crossed Rs8 trillion for the first time despite a sharp fall in returns, the State Bank of Pakistan (SBP) reported on Oct 27.

The increase in the investment in government papers by banks as well as the corporate sector indicates that the options for parking their liquidity have been drastically reduced.

It also indicates that domestic investments could not rise despite tall claims by the government.

The SBP report reveals that the corporate sector has increased its investment in government papers. It is the evidence of surplus liquidity being dumped into government securities despite low returns.

Although the holdings of banks are still higher than those of the corporate sector, the latter has also increased its share in government papers to 19.2 per cent. Earlier, the non-bank/corporate sector had a share of around 13-15pc in government securities.

Banks have been criticised for putting 90pc of their investments in government papers. Yet they have kept on investing in risk-free securities at the same pace despite a drastic cut in the interest rate.

The sharp fall in the interest rate and returns on Pakistan Investment Bonds (PIBs) significantly reduced the profits of most banks in the first nine months of the ongoing calendar year.

Data shows the investment in PIBs has declined, but it remains higher than the investment in treasury bills. Holdings of PIBs at the end of September were Rs4.144tr while those of treasury bills were Rs3.495tr.

The investment by non-banks/corporate sector rose to Rs1.537tr, showing their preferred avenues for parking liquidity. The corporate sector should ideally use its funds for the expansion of operations or launch of new ventures.

Holdings of scheduled banks rose to Rs6.466tr, which shows little change from past practices. Banks have relied heavily for more than a decade on government papers that provide a safe and risk-free investment avenue.

In the last couple of years, the corporate sector also started investing in real estate, which is the prime reason behind the increase in land prices across the country.

Massive investments by the corporate sector have made real estate out of the reach of most Pakistanis. Land prices do not show any connection with the income of middle or upper-middle-class Pakistanis anymore.

However, the government recently levied taxes on the real estate business, which surprised investors. The move stopped the flow of liquidity into real estate, which led to increased investments in government securities.

Published in Dawn, October 30th, 2016