Whenever the conversation turns to reviving the economy, we look in one direction: the federal government. A subsidy here, a development-spending push there, a tax break to coax investment. Under the current International Monetary Fund programme, however, Islamabad is committed to running primary surpluses, winding down concessional schemes, and keeping its hands off the interventions that used to pass for industrial policy. The fiscal engine of growth, for now, is throttled.
But it is not the only engine. There is a second one, sitting mostly idle, in the private sector.
Commercial banks hold north of $140 billion in deposits. Of every rupee held with them, they lend out only forty paisas. If banks lifted that ratio by even five per cent to 10pc, that would push between Rs2tr and Rs4tr into productive lending. That is a stimulus on the scale of a major public spending programme, except that it would cost the exchequer nothing. It is existing liquidity redirected from financing the state to financing the real economy. And because it better uses existing money rather than create new money, it works with the grain of a tight monetary policy.
The banks are not holding back because they lack capital. Productive lending simply cannot compete with a government bond on a risk-adjusted basis. The bond pays well, costs nothing in capital, and never defaults. Meanwhile, a project loan demands underwriting, ties up the balance sheet for years, and carries real risk of loss. We have also learnt that a balance sheet cannot be scolded into taking risk it is not paid to take. The durable answer therefore is to change the relative economics of productive lending.
