ISLAMABAD - Former governor of State Bank of Pakistan, Salim Raza on Wednesday said that debt markets in Pakistan are shallow as well as small with less than 5 per cent of the primary banking market whereas bank deposits are 30 percent of GDP.

He said this while delivering a lecture on “Financial Sector Reforms: Deepening and Widening the Pakistan’s Financial Sector” at the Pakistan Institute of Development Economics (PIDE), Islamabad. He said that debt markets have contracted over the years, as evidenced by falling investment to GDP ratio. He further said that lack of depth in market has limited the access to credit, leading to high interest rate spreads in the banking sector.

Raza pointed out that in Pakistan currency in circulation as a percentage of total deposits is 31 percent, which is very high as compared to other countries, such as India and Bangladesh. On the other hand, the deposits as a percentage of GDP are quite low in Pakistan, which were 30 percent of GDP in FY11. This limits the availability of the credit for the private sector.

He said that underdevelopment of public debt instruments is not due to lack of legal framework or lack of professional expertise; rather the prevailing situation is due to public and private management and governance practices.

He urged the promotion of banking at the grassroots level to scale up bank deposits. He proposed steps to reduce currency in circulation, which included promotion of micro-finance, branchless banking, removal of negative fiscal levies, and higher interest rates through competition from foreign exchange income. He stressed the need for a professionally and well functioning debt management office in the Ministry of Finance.

The ex-governor SBP further said at the moment the investment banking activity in Pakistan is extremely limited and there is a need to strengthen the investment banking in Pakistan. The investment banks in Pakistan are very small as compared to large commercial banks. He said that the State Bank of Pakistan and SECP should chalk out an action plan to support investment banking activity in Pakistan. These banks should be under the same regulator as commercial banks to provide them with level playing field.

He pointed out that fiscal and financial constraints are hampering the capacity for investment and growth. Ministry of Finance and regulatory authorities have to support the rapid development of deeper debt markets, through reform of government debt management and through promotion of public debt issuance, Raza concluded.

Vice Chancellor PIDE Dr Rashid Amjad, while speaking on the occasion, said that a major cause of the continuing stagflation in Pakistan was lack of coordination between fiscal and monetary authorities.

“It was clear that poor financial management of its foreign and domestic debt was worsening the situation and that immediately measures needed to improve the deteriorating financial situation,” he said.