Think tank asks government to reduce huge subsidies to banks
A new independent think tank is calling on the government to rethink its fiscal
priorities—urging it to end generous subsidies to banks and redirect those
funds toward reviving Pakistan's struggling industrial sector.
In a sharply worded statement, the Economic
Policy and Business Development (EPBD) institute criticized the policy of
guaranteeing returns to banks on government debt. The group argued that
Pakistan must choose between subsidizing profitable banks or investing in
productive sectors to create jobs and stimulate long-term econo
mic growth.
The call came as the Economic
Coordination Committee (ECC) of the Cabinet flagged a surge in bank subsidies
under the Pakistan Remittances Initiative. Banks have claimed Rs200 billion
this fiscal year—Rs115 billion more than budgeted—to incentivize remittance
inflows.
According to EPBD, the government’s
current fiscal strategy is economically counterproductive. Of the Rs8.2
trillion allocated for total debt servicing in the 2024–25 budget, Rs7.2
trillion is earmarked for domestic debt—largely held by local banks through
high-yielding government securities. This setup, the institute said, guarantees
bank profits while starving businesses of affordable credit.
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“This approach prioritizes bank
profits over economic development,” the think tank said. “With policy rates at
11%, it stifles growth while our regional peers expand their industrial and
export capacity.”
EPBD has recommended slashing the
policy rate to 6%, aligned with falling inflation, which it says could reduce
debt servicing costs by up to Rs3 trillion. These savings, even if partially redirected,
could significantly lower business borrowing costs and support small and medium
enterprises, export competitiveness, and technology upgrades.
The think tank also criticized
recent government borrowing practices—specifically the issuance of Rs2 trillion
in fixed-rate Pakistan Investment Bonds at peak interest rates of 22%—saying
they have locked the country into unsustainable long-term liabilities.
Moreover, EPBD rejected the
long-held belief that lower interest rates lead to current account deficits. It
cited the $19 billion deficit in 2021–22 as driven by exceptional,
non-interest-sensitive imports, including $3.2 billion in COVID-19 vaccines,
$15.6 billion in energy imports, and $1.7 billion in smartphones—costs that
persisted despite high interest rates.
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“High rates failed to curb imports
but succeeded in suppressing domestic business activity,” it noted.
The statement also condemned the
current structure of bank lending, revealing that 97.3% of bank investments are
parked in risk-free government securities. This has turned commercial banks
into de facto bond traders, diverting capital away from manufacturing, exports,
and job creation.
“Pakistan’s businesses are unable to
access credit for inventory, expansion, or technology,” the think tank said.
“Meanwhile, banks earn guaranteed profits backed by taxpayer funds without
contributing to real economic output.”
The EPBD further criticized the
remittance subsidy structure, pointing out that Rs87 billion went to banks for
basic money transfers—funds that could be more productively deployed to support
entrepreneurship and SME growth.
At Friday’s ECC meeting, finance
officials acknowledged that the remittance subsidies—ongoing since 1985—have no
proven benefits and are increasingly unsustainable. The Ministry of Finance
confirmed the decision to phase them out in FY2024–25, citing pressure from the
IMF and the banking sector. Without reform, officials warned, the subsidy bill
could rise to Rs500 billion in coming years.
In conclusion, the EPBD argued that
Pakistan’s future hinges on shifting public resources away from guaranteed
returns for banks toward policies that foster industrial competitiveness,
employment, and export growth.
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“Our businesses don’t need
handouts—just fair access to capital,” the think tank asserted. “A 6% policy
rate would level the playing field with regional economies and unlock
underutilized manufacturing potential.”
It emphasized that while capacity
exists, lack of affordable financing keeps factories idle and entrepreneurs
sidelined. By redirecting fiscal and monetary policy toward the private sector,
Pakistan could join its neighbors in achieving sustainable 6% GDP growth
without compromising fiscal stability.
Source: Express Tribune