ISLAMABAD: The International Monetary Fund (IMF) has cautioned that the entrenched nexus between the government, the central bank and the banking sector is detrimental to the country’s economy and financial sector, as this relationship can lead to conflicting policies, regulatory challenges and a debt-inflation trade-off.
In a special chapter in the IMF’s latest report on the country’s recently approved $7 billion Extended Fund Facility (EFF), the lender said Pakistan’s banking sector “holds the world’s largest proportion of government securities relative to its total assets”.
The banks in recent years have funded a significant part of their growing securities portfolios via short-term central bank liquidity using bonds as collateral in the wake of limited deposit growth. “This complex tripartite relationship means that developments or actions in one domain — fiscal, monetary, or banking — can have wide-ranging effects........