Commercial banks rule the roost

Commercial banks rule the roost


Ban on government borrowing from the SBP to create a monopoly of foreign lenders

Commercial banks rule the roost

KARACHI: Now the government will be forced to go for expensive borrowing from commercial banks for budget financing or any other need as a new controversial law has barred it from obtaining loans from the country’s own central bank.

The amendment in the State Bank of Pakistan (SBP) Act, 1956, through the SBP (Amendment) Act, 2021 has firmly closed the door for the government to borrow from the central bank.

Experts and analysts believe that a complete ban on government borrowing from the SBP will create a monopoly of the commercial banks, as the government will be at their mercy for budget financing. The commercial banks may take advantage of the situation and force the government to borrow money on higher markups.

A senior economist Dr Kaiser Bengali said that the SBP Amendment Law allows the government to borrow only from commercial banks, which are largely foreign owned,” he said.

For Bengali the objectives of the bill are to open a window of assured profit for foreign commercial banks and bind the government to interests and dictates of the international finance institutions.


“The SBP shall not extend any direct credits to, or guarantee any obligations of the government, or any government-owned entity, or any other public entity,” Dr Bengali said.

The government’s requirement to borrow for budget financing is gradually increasing with the expansion of the economy.

The government owes a total of Rs11.18 trillion to the commercial banks as the outstanding dues by the end of June 30, 2021. The borrowing from the commercial banks stood at Rs2.47 trillion in the fiscal year 2019/20 and Rs2.96 trillion in the fiscal year 2020/21.

The government borrows from the commercial banks through the sale of securities, including Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs). The cutoff yield on these maturities is usually linked with the key policy rate. Normally, the cutoff yield remains slightly higher than the key policy rate. However, in an auction of MTBs held on December 1, 2021, the central bank sold the benchmark six-month treasury bills at the annualised markup of 11.0587 per cent, a much higher rate, compared with the key policy rate of 8.75 per cent.

It was the example that the banks had compelled the government to take costly loans for repayment against matured amounts of treasury bills.

Finance Minister Shaukat Tarin, who tabled the SBP amendment law, strongly advocated the autonomy of the central bank.


On December 8, 2021, Tarin admitted that the banks were blackmailing the government and manipulated lending at higher interest rates.

The interest rates on T-bills were misused and commercial banks had blackmailed the government, he said.

“Please don’t push us; we have other options,” he said, while giving warning to the banks.

Although the government borrows for budget financing, the latest auction calendar of MTBs issued in January 2022 for the next three months revealed that the repayment for matured amounts is larger than the targeted borrowing.

According to the SBP, the government has to raise Rs4.4 trillion in the auction of MTBs during January-March 2022. The repayment for maturities during this period stood at Rs4.53 trillion. This shows desperation of the government to take loans from the commercial banks to repay outstanding dues instead of financing the budget gap.

The SBP’s role in the past has tilted towards commercial banks, especially in tightening the monetary policy. The central bank raised the key policy rate by 275 basis points to 9.75 per cent during the last three announcements. The hike in the last policy rate was made on December 14, 2021.


On the one hand, the industry was making hue-and-cry over the higher interest rates at difficult times for undertaking manufacturing and commercial activities but, on the other, the banks were building their deposit base due to attractive rates of returns.

The deposits of the banking system reached an all-time high of Rs20.97 trillion by the end of December 2021.

While raising the policy rate by 100 basis points to 9.75 per cent in its announcement on December 14, 2021, the SBP said: “The goal of this decision is to counter inflationary pressure and ensure the growth remains sustainable.”

Despite tightening the monetary policy, the headline inflation for January 2022 recorded a two-year high of 13 per cent.

Dr Ashfaque Hasan Khan, a leading economist, said the massive rise in the key policy rate accelerates inflation rather than controlling it. Besides, the action would compromise economic growth. “Every one percentage point increase in the interest rate takes inflation higher by 1.3 percentage points,” he said.

The higher interest rate will further increase the burden on the government debt. The banks know the option of borrowing from the SBP is no more and they will lend at their terms and conditions.


Experts believe the government should review the law and repeal it at the earliest.

Dr Kaiser Bengali in a latest tweet said: “The SBP law is not technical, it is political. The government of Pakistan is now subservient to the SBP and private banks. The SBP Enslavement Act must be repealed.”


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