Pakistan’s private sector has significantly scaled back borrowing in the first quarter of the current fiscal year, opting instead to retire a substantial amount of debt. According to data released by the State Bank of Pakistan (SBP), the private sector retired Rs297 billion in loans during July to September FY26, a sharp contrast to Rs18.5 billion in the same period of the previous fiscal year.
The July–September period ended with zero net borrowing by private businesses, underscoring weak credit demand in the face of sluggish economic activity, persistent uncertainty, and rising security concerns. This shift marks a stark reversal from the previous fiscal year, when private credit had rebounded strongly and surpassed Rs1 trillion by the end of FY25 — the highest in three years.
Despite that credit surge, overall economic growth during FY25 remained modest at 2.68 percent, later revised upward by the National Accounts Committee (NAC) to 3.04 percent. Independent economists, however, questioned the upward revision, citing underlying weaknesses in investment and productivity indicators.
Analysts say that the subdued credit demand, despite a reduction in the central bank’s policy rate to 11 percent, reflects a broader climate of uncertainty. Political instability and heightened security concerns in key business regions such as Khyber Pakhtunkhwa and Balochistan have weighed on investor confidence and expansion plans. Many firms appear to be prioritizing debt repayment over fresh capital expenditure or inventory buildup.
While private credit remains stagnant, commercial banks continue to post record earnings driven largely by heavy government borrowing. With fiscal pressures intensifying, the banking sector is expected to remain reliant on government paper for profitability through FY26. Market watchers believe this trend could crowd out private sector credit, further constraining economic expansion in the coming months.
At the same time, the government faces fiscal challenges as the Federal Board of Revenue (FBR) continues to struggle with collection shortfalls. The FBR missed its Q1 target by Rs199 billion, primarily due to weak domestic sales tax collections and declining revenue from utility bills. A combination of slower business activity, frequent power outages, and the growing shift toward solar energy has contributed to reduced consumption of conventional utilities, impacting tax inflows.
Economists warn that if private credit remains depressed, it could dampen investment activity and stall economic momentum. A strong revival in private borrowing is often seen as an early indicator of improving business confidence and growth prospects. For now, many firms are taking a cautious stance, choosing to strengthen balance sheets rather than expand operations.
This trend comes at a critical time when the government is seeking to stabilize the economy through fiscal consolidation and structural reforms under its engagement with multilateral lenders. Without a pickup in private sector investment, sustaining growth momentum may prove challenging in FY26.
The central bank is expected to keep a close watch on credit trends in the coming quarters, with further policy adjustments potentially on the table to stimulate private investment if conditions remain weak.
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