‘Businesses can’t expand while banks earn from govt debt’

LAHORE: Economic Policy and Business Development, a think tank, has feared that Pakistani businesses cannot compete, expand, or create jobs while banks earn guaranteed returns from government debt. Regional economies with 5.5% policy rates and 25% debt servicing achieve 6% growth by supporting business development, it added.

According to the think tank study, the government justifies this constraint through fear of Current Account Deficits, claiming high interest rates prevent import surges. But the import data proves this reasoning is flawed. The 2021-22 CAD surge was driven by COVID vaccines ($3.2 billion), energy crisis ($15.6 billion), and smartphones ($1.7 billion) - none of which were interest rate sensitive. High rates contributed nothing to import control while crushing domestic business activity.

It has further been pointed out that Pakistan allocates Rs 7.197 trillion annually to debt servicing - 46% of federal expenditure flowing to banks as guaranteed profits. With 59% of government debt (Rs 25,758 billion) in floating-rate instruments, reducing policy rates from 11% to 6% would generate immediate savings on the majority of debt stock. The government compounded this burden by issuing Rs 2 trillion in fixed PIBs at peak rates of 22% during FY23-FY24, locking in excessive costs for banks’ benefit.

Despite this poor timing, Rs 3 trillion in annual savings remain achievable through rate reduction on floating debt. With current inflation at 4.5%, a 6% policy rate would provide adequate real returns while significantly reducing debt servicing costs. This money could transform Pakistani business through manufacturing revival, industrial expansion enabling technology investments and job creation, SME development providing access to growth capital, and export enhancement through competitive financing costs.

Instead this money guarantees banking sector returns while businesses struggle with credit starvation. Pakistan's banks operate as government bond traders while businesses cannot access productive financing. Banks earn guaranteed returns from public funds while contributing zero value to productive economic activity. The remittance system compounds this issue, with Rs87 billion flowing to banks for basic money transfers - resources that could finance small business development.

Copyright Business Recorder, 2025