At first glance, Pakistan’s economy seems to be on a slow but steady recovery path. Macro indicators are stabilizing, and cautious optimism is re-emerging. However, beneath the surface, deep-rooted structural flaws persist. A glaring example is the Investment-to-Deposit Ratio (IDR), which has surged to an all-time high of 103%, surpassing total deposits for the first time in the country’s history.
This unusual development signifies that banks are heavily investing in government securities, while private sector credit—the cornerstone of long-term economic growth—is being severely restricted. Although this strategy might temporarily enhance bank profitability and help manage the fiscal deficit, it poses long-term risks for economic expansion, employment, and innovation.
The Mechanics Behind the Shift
Due to IMF-imposed restrictions, the Pakistani government is barred from borrowing directly from the State Bank of Pakistan (SBP), which historically led to unchecked money printing and high inflation. To navigate this limitation, the government and SBP have turned to Open Market Operations (OMOs), injecting a record Rs14 trillion into commercial banks to maintain liquidity.
Banks, in turn, funnel this liquidity into government debt instruments—safe, profitable, and free from the risks associated with private lending. This creates a closed financial loop: the government borrows indirectly from SBP via private banks, and banks earn without taking meaningful credit risks.
Impact on Private Sector and Real Economy
“As of June 2025, the IDR has hit 103%, up 608bps year-on-year. Banks are now investing more than their total deposits,” stated Ali Najib, Deputy Head of Trading at Arif Habib Ltd.
Meanwhile:
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Deposits grew by 14.1% YoY, reaching Rs35.5 trillion.
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Bank investments surged by 21.2% to Rs36.6 trillion.
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Private sector advances increased by just 8.7%, totaling Rs13.5 trillion.
As a result, the Advance-to-Deposit Ratio (ADR) dropped to 38.1%, down from 40.0% in June 2024 and 39.8% in May 2025. This signals a growing reluctance among banks to extend credit to businesses and individuals.
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Risks and Consequences
This imbalance has serious implications:
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Crowding out the private sector, especially SMEs and startups.
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Reduced job creation due to limited capital availability.
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Slower economic recovery despite positive headline indicators.
While deposit growth and government-backed earnings keep the banking sector stable, the real economy—dependent on private credit—is slowly being choked.
Policy Outlook: What Needs to Change?
Experts argue that unless Pakistan’s monetary and fiscal authorities realign incentives, this skewed credit allocation could persist. Key recommendations include:
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Incentivizing private sector lending through revised risk frameworks.
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Offering credit guarantees for SMEs.
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Encouraging productivity-linked investments.
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Exploring alternative financing channels like capital markets and fintech credit.
