KARACHI: Banks` investments in government papers reached Rs26 trillion by December 2024, contributing 57.6 per cent to the central government`s domestic debt.

The latest data issued by the State Bank of Pakistan (SBP) revealed how banks` money runs the central government and how the banks earn record profits from taxpayers` money.

It`s not new that the government borrows from banks but the size of banks money has been increasing as domestic debts. The data also showed that the banks had been making record profits by getting high interest rates, like 22 per cent during the entire FY24, while the return on T-bills remained around this rate and sometimes even higher than the policy rate.

This massive investment in government papers left little room for lending to the private sector. However, in the second quarter of the current fiscal year, the banks had to increase lending to meet the advance-to-deposit ratio (ADR) limit to avoid the 15 incremental tax imposed by the federal government.

Banks suddenly increased their lending to the private sector, which reached around Rs1.3tr; now, this lending size is shrinking. To avoid tax on lower ADR, the banks lent Rs1.3tr to the non-banking financial institutions (NBFIs) as short-term lending.

The details showed that the banks` most significant investment was in thelonger-term Pakistan Investment Bonds (PIBs). The total investment of PIBs till Dec 2024 was Rs26tr. Scheduled banks` investment in PIBs was Rs19.4tr while the rest of Rs6.332tr was invested by non-banks or corporate sector. The nonbanks include insurance, funds, corporates and others.

The Islamic bonds, sukuk, also attracted a total Rs5.757tr till Dec 2024 while the banks` investment in this bond was Rs3.2tr and non-banks invested the rest of Rs2.555tr.

However, the market treasury bills (MTB) attracted was much lower than the PIBs as it was about Rs9.961tr -banks` invested Rs5.332tr while Rs4.622tr by others.

The total investment by the banks and non-banks at the end of Dec 2024 was Rs41.5tr; scheduled banks` invested (PIBs+MTB+sukuk) Rs28tr and nonbanks Rs13.5tr.

The figures suggested that banking in Pakistan could not stimulate the economy. Instead, the banks have been making money by investing in government papers, and the government retires its debt with taxpayer`s money. The government has always been quick to impose new taxes for higher revenue collection, but thereisno check on spending.

Financial experts believe that the fiscal deficit would be much higher than the estimates given in the budget. The FBR is already short of Rs388bn from the target.

The government has budgeted an overall fiscal deficit of 6.9pc of GDP for 202425 against the revised 7.4pc for 2023-24.

The federal budget deficit is projected at Rs8,500bn for 2024-25 against Rs7,506bn budgeted for 2023-24; it was revised upwards to Rs8,388bn.