What is the ‘nexus’ between banks, the SBP and the govt that the IMF is pointing towards?

The recent report by the International Monetary Fund (IMF) on the $7 billion bailout package it has extended to Pakistan contains some truly eye-opening information. 

In a very small but well-sumpled-up section, the IMF’s report points towards a nexus that exists between the state, the central bank, and the banks they are supposed to regulate. The report points towards a damning statistic. Currently, 60% of the assets held by the commercial banking sector in Pakistan are domestic government debts. This means if we were to tabulate the balance sheets of all of Pakistan’s commercial banks in one place, nearly two-thirds of their total assets would be money the government owes them and not money they have in their hands. 

It is truly bleak. The share of government debt as 60% of all assets is three times higher than the average for Emerging Market Economies like Pakistan.

How did we get to this place? Well, the banks have been in a very comfortable position for the past few years. In fact, it almost seems they have become unwilling to perform their actual function.