KARACHI: Amid tumbling advances to the private sector, banks invested a record amount in risk-free government securities during the first eight months of the calendar 2024, posting a year-on-year surge of 21 per cent.

This trend has indicated banks’ preferences for making easy and huge profits by extending risk-free loans to the government at unprecedented high interest rates.

The latest data from the State Bank of Pakistan showed the scheduled banks’ investments increased by Rs5.429 trillion or 21.2pc during January-August in calendar year 2024. Banks’ total investments in government papers reached Rs31.032tr at the end of Aug 31 from Rs25.603tr on Jan 1.

It is almost double the amount banks parked in the government papers during the same period of the previous calendar year. The scheduled banks’ investments increased by Rs2.723tr to Rs22.016tr in August 2023 from Rs19.293tr in January 2023.

Advances to private sector fall in January-August

The banks’ surging investments reflect the aggressive borrowing by the government. Another SBP report shows the borrowing from scheduled banks reached Rs26.866tr at the end of June. The huge government borrowing proved a killing trap for the economy as the entire tax revenue was used to service the debts.

During 2023, the scheduled banks’ investments increased by Rs5.986tr to Rs25.279tr in December from Rs19.293tr in January. The investments in the first eight months of the current calendar year are much higher than the previous year.

The government has planned to borrow around Rs9.3tr to meet its fiscal gap. Some officials said salaries are paid through borrowing, reflecting a grave financial situation of the government.

The government needs to adopt growth-led policies to set tall targets for revenue generation. Experts said the projected 2.5 to 3.5pc economic growth for FY25 could not generate enough revenue to run the state machinery and the government will keep borrowing to bridge the gap.

Many experts have been advising the government to stop overspending, but there is no sign of the most needed cut in the current expenditure. The government has also failed to generate revenue by privatisation of some key state-owned enterprises, but no buyers are available.

Slow lending to private sector

The situation regarding borrowing by the private sector is more pathetic as it dropped during the first eight months of 2024. The data showed that bank advances dropped by Rs287 billion to Rs11.807tr by the end of August, compared to Rs12.094tr in January.

For the last two years, banks’ advances to the private sector remained at the lowest level, which reflected the poor economic growth rate. The economy shrank in FY23, while FY24 noted a meagre expansion of 2.4pc. Experts give many reasons for the poor growth rate, but they primarily hold political uncertainty and high inflation and interest rates as key factors marring economic growth.

Published in Dawn, September 22nd, 2024