Government Borrowing Crowds Out Private Credit, Slows Growth

Extensive government borrowing from the banking sector over the last two and a half years has squeezed credit availability for the private sector, curbing economic momentum despite a significant surge in public revenues and overall liquidity, according to official figures released by the State Bank of Pakistan (SBP).

SBP data reveals that the government borrowed Rs8.52 trillion from banks in FY24, followed by Rs5.43 trillion in FY25, and an additional Rs2.1 trillion during the first seven months of FY26. Total bank borrowing during this period reached nearly Rs16 trillion, representing roughly half of the government’s total bank borrowing stock of Rs32.3 trillion recorded by June 2025.

Meanwhile, government revenues almost doubled within two years, climbing from Rs9.6 trillion to close to Rs18 trillion, driven by stronger tax collection, fresh revenue measures and increased transfers from the central bank.

Overall, the government raised approximately Rs24.5 trillion through a mix of higher revenues and bank borrowing over this timeframe.

Despite the scale of funds circulating in the system, economic expansion remained weak. Lending to the private sector during the same period stood at just Rs2.2 trillion, highlighting a stark imbalance between government borrowing and the availability of credit for businesses.

Economists point out that heavy government reliance on bank financing crowded out private-sector lending.

Pakistan has faced persistent challenges in lifting growth over the past three years, with the GDP growth target for FY26 set between 3.7% and 4.7%. The central bank anticipates growth to remain closer to the lower bound of this range.

While inflation has moderated to around 5.6%, the central bank has maintained a cautious monetary approach and has not indicated broad interest rate cuts to revive private credit. The only recent support for exporters has been a cut in refinancing rates, which has yet to produce a noticeable export recovery.

Business and trade groups have repeatedly urged authorities to bring interest rates closer to inflation levels to improve credit access. Policymakers, however, appear more focused on preserving stability than accelerating growth.

Sluggish growth has pushed poverty levels higher, with estimates suggesting nearly 46% of the population now lives below the poverty line. Analysts note the absence of a comprehensive policy framework to tackle unemployment and poverty, which continue to be addressed largely through informal networks and charitable support.