The federal government has significantly reduced the mark-up rate charged on development loans and advances extended to provincial governments, local bodies, state-owned entities, and public sector financial institutions. According to an official notification issued by the Ministry of Finance, the interest rate for the outgoing fiscal year ending June 30, 2026, has been established at 11.89 percent. This adjustment reflects a substantial drop of nearly six percentage points compared to the 17.74 percent mark-up rate charged in the 2024-2025 fiscal year, as well as the 17.84 percent rate applied during the 2023-2024 period. The substantial downward revision in borrowing costs is primarily attributed to the central bank monetary easing cycle, which saw the key policy rate fall from a peak of 22 percent down to 11.5 percent.
The revised mark-up rate applies directly to cash development loans disbursed by the federal government to the governments of Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan, alongside the administrative territories of Azad Jammu and Kashmir and Gilgit-Baltistan. Beyond provincial financing, the updated interest structure governs federal loans provided to local municipalities, state-owned corporations, autonomous statutory bodies, and state financial institutions. Additionally, the rate covers capital outlays across commercial departments and specific public sector advances. The Ministry of Finance notification specified that the final rate of 11.89 percent per annum will also apply to specialized loans and advances granted to government employees for conveyance purchases and house building applications for the 2025-2026 fiscal cycle.
While the current rate drop brings relief to provincial budgets and state enterprise balance sheets, long-term historical data indicates that public sector borrowing costs remain elevated compared to earlier decade averages. The current 11.89 percent rate sits approximately fifteen percent higher than the 10.30 percent rate recorded in the 2020-2021 fiscal year. Looking further back, the federal mark-up charged on development financing stood at 6.54 percent in the 2016-2017 period, meaning borrowing costs have surged by roughly 175 percent over the past nine years. This rising interest trajectory has transformed loan servicing fees into a vital source of revenue for the central government, generating approximately 164 billion rupees in mark-up collections from provincial governments and state entities during the 2025-2026 fiscal year alone.
The federal government utilizes two primary operational mechanisms to fund these public assistance initiatives, divided between direct cash development loans sourced from internal revenues and foreign re-lent loans. Typically, the federal government contracts international development loans from global multilateral institutions at concessionary interest rates averaging around two percent, which are then re-lent onward to provincial and local entities at higher domestic mark-up rates. Annual mark-up rates are periodically revised based on the federal government’s underlying debt servicing expenditures on domestic sovereign securities, including Treasury Bills and Pakistan Investment Bonds. By reducing the annual interest rate in tandem with falling central bank policy benchmarks, the government aims to lower debt service pressures on provincial treasuries and state-owned entities as they execute national infrastructure programs.
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