ISLAMABAD: Former Governor of State Bank of Pakistan, Salim Raza, said on Wednesday that debt markets in Pakistan are shallow as well as small with less than 5 per cent of the primary banking market whereas bank deposits are 30 per cent of the GDP, which is a cause for low investments in the country.

“Debt markets have contracted over the years as evidenced by falling investment to GDP ratio, while lack of depth in market has limited access to credit, leading to high interest rate spreads in the banking sector,” Mr Raza said.

Delivering a lecture on “Financial Sector Reforms: Deepening and Widening the Pakistan’s Financial Sector,” at the Pakistan Institute of Development Economics (PIDE), he pointed out that in Pakistan currency in circulation as a percentage of total deposits is 31 per cent.

“This is very high compared to other countries, such as India and Bangladesh.”

He added that on the other hand, deposits as a percentage of GDP are quite low in Pakistan, which was 30 per cent of the GDP in the previous fiscal year.

“This limits the availability of the credit for the private sector resulting in lack of investments.”

He said that underdevelopment of public debt instruments is not due to lack of legal framework or lack of professional expertise; rather the prevailing situation is due to public and private management and governance practices.

He called for promotion of banking at the grassroots level to scale up bank deposits and proposed steps to reduce currency in circulation, which included promotion of micro-finance, branchless banking, removal of negative fiscal levies and higher interest rates through competition from foreign exchange income.

“But first we need a professionally and well functioning debt management office in the ministry of finance.”

Investment banking activity in Pakistan is extremely limited and there is a need to strengthen investment banking in Pakistan, he said, adding investment banks in Pakistan are very small as compared to large commercial banks.

Regarding promotion of investment banking in the country, he said that the State Bank of Pakistan and Securities and Exchange Commission of Pakistan (SECP) should chalk out an action plan and these banks should be under the same regulator as commercial banks to provide them with a level-playing field.

Mr Raza pointed out that fiscal and financial constraints are hampering the capacity for investment and growth, while the Ministry of Finance and regulatory authorities have to support rapid development of deeper debt markets, through reform of government debt management and through promotion of public debt issuance.

PIDE VC Dr Rashid Amjad said that a major cause of continuing stagflation in Pakistan was lack of coordination between fiscal and monetary authorities.

Poor financial management of its foreign and domestic debt, he said, is worsening the situation and that measures should be taken to improve the deteriorating financial situation.