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 its concentration: over the past decade, commercial banks have held the bulk of the federal government’s debt. Of Pakistan’s Rs54.5 trillion in domestic debt, the bulk sits in marketable instruments, worth Rs46.6tr; of that, scheduled banks hold Rs36.8tr, or 79pc. Insurers account for under 5pc, mutual and pension funds for about 6pc, and a catch-all bucket of “corporates and others” for the rest. This makes the bank-sovereign nexus extreme by global standards. A World Bank analysis from the end of 2024 put Pakistani banks’ public-debt holdings at roughly 60pc of total assets, four times the global median and the highest in a sample of over 80 countries. As a result, the effect on credit activity has been highly detrimental, with the industry’s advances-to-deposits ratio hovering below 40pc and the share of small and medium enterprises barely 10pc of private-sector loans. Shift even a tenth of the Rs54tr domestic stock out of banks and into retail hands at a yield just 150 basis points cheaper, and the annual saving runs into the region of Rs80bn Since the two balance sheets of banking and sovereign are wound so tightly together, the relationship has curdled into something toxic. The government borrows from banks, taxes the profits from that borrowing, and banks push money away rather than put it to work. Somewhere in this loop, both the depositor and the real economy have been forgotten. When 79pc of the outstanding paper sits with a small club of institutional buyers, those buyers carry real