Cutting out the middleman
Every federal budget is a stark reminder of how much Pakistan’s federal government is unable to spend within its means. Therefore, the burden to keep fiscal balance somewhat manageable falls on the same few sacrificial lambs, typically the formal sector in terms of collection and development needs for expenditure. Troublesome as it may be, the country’s gross public debt ratio of 70 per cent is not outrageously high by developing economy standards. However, one big problem is
Pakistan's federal government faces significant fiscal challenges, with commercial banks holding an overwhelmingly large portion of its domestic debt. This concentration, reaching 79% of marketable instruments, creates an extreme nexus between banks and the sovereign, far exceeding global norms. As a result, credit activity is hampered, with low advances-to-deposits ratios and minimal lending to small and medium enterprises. The current system, where banks lend to the government and are then taxed on those profits, creates a toxic loop that neglects both depositors and the broader economy. This dominance by a few institutional buyers allows them to exert significant pricing power, leading to higher borrowing costs for the government.
This situation matters because a more diversified base of debt holders could reduce government borrowing costs, stimulate private sector lending, and foster greater economic activity.
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