The federal government’s borrowing from commercial banks surged by 61% during the first nine months of fiscal year 2025-26, highlighting growing reliance on domestic financing, according to data released by the State Bank of Pakistan (SBP).
Between July and March, the government borrowed approximately Rs2.90 trillion from commercial banks, compared to Rs1.80 trillion in the same period of the previous fiscal year. The borrowing was primarily conducted through auctions of Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs), which are used to finance the budget deficit.
While borrowing from commercial banks increased significantly, the government simultaneously retired a substantial amount of debt owed to the central bank. According to the SBP, the government repaid around Rs2.14 trillion to the central bank during the first nine months, compared to borrowing of Rs489 billion in the corresponding period last year.
Financial experts say this repayment aligns with the requirements of the Fiscal Responsibility and Debt Limitation framework, which aims to maintain fiscal discipline and control monetary expansion.
However, the sharp rise in government borrowing from commercial banks has raised concerns about its impact on the private sector. Economists warn that heavy public sector borrowing can limit credit availability for businesses, potentially slowing economic growth and investment.
Private sector borrowing increased only marginally to Rs833 billion during July–March 2025-26, compared to Rs778 billion in the same period of the previous year. Experts note that this modest increase is surprising, especially given the significant decline in interest rates during the year.
The central bank reduced the policy rate from a historic high of 22% to 10.50% over several policy decisions, aiming to stimulate economic activity and encourage lending. However, analysts say that the expected boost in private sector credit demand has yet to materialize at a meaningful level.
Economists believe that continued reliance on domestic borrowing by the government may create a crowding-out effect, limiting financing opportunities for the private sector. This could hinder industrial growth, job creation, and overall economic expansion in Pakistan.
As fiscal pressures persist, experts emphasize the need for improved revenue generation, reduced deficit financing, and policies that encourage private sector participation to ensure long-term economic stability.