Tatton Teaser
Posted 27 August 2024
Pakistan’s Balancing Act: High Stakes of Government Debt for Banks
Pakistan’s banks are walking a tightrope, with an alarming proportion of their assets tied to government debt. Estimates suggest a staggering 50-60% exposure, dwarfing the global average. This compares to less than 10% for US banks and even emerging markets like India and Brazil, where figures hover around 15-20%. This overreliance is not by choice but necessity, stemming from Pakistan’s underdeveloped financial markets, which offer limited investment options beyond government bonds. Furthermore, the high cost of corporate credit deters many businesses from seeking bank loans, further narrowing the banks’ lending opportunities. This precarious situation is exacerbated by historical political influence. Banks have often been encouraged – even pressured – to invest in government debt, sometimes with implicit guarantees or favourable terms.
While this provides the government with a convenient funding source, it also creates a potentially dangerous cycle. In a crisis, the government might need to rely on the State Bank of Pakistan (SBP) to bail out struggling banks, given the significant portion of government debt held by these banks. This interconnectedness raises concerns about the SBP’s independence, as it could be pressured to prioritise government financing needs over maintaining financial stability in an emergency. Such a scenario could lead to inflationary measures or increased government debt, further destabilising the economy.
Pakistan’s high exposure, compared to its emerging market peers, amplifies the country’s vulnerability to economic shocks. Though the current low default rates may provide a false sense of security, the long-term consequences of this concentrated risk could be devastating.
It’s a wake-up call for policymakers to urgently diversify the banking sector’s loan portfolio and explore alternative funding avenues for the government. Ignoring this precarious balancing act and the underlying structural issues could jeopardise Pakistan’s economic stability and future growth prospects, especially when compared to the relative resilience of other emerging markets.
Thank you Anthony Graham for the analysis.
