Pakistan’s federal government retired approximately Rs2.31 trillion in bank borrowing during the first quarter of fiscal year 2026-27, marking a substantial increase in repayments compared with the corresponding period of the previous fiscal year. According to data released by the State Bank of Pakistan (SBP), the government retired Rs497.73 billion in bank borrowing between July and September of FY2026, while repayments during the same three-month period of FY2027 reached Rs2.31 trillion. The figures indicate a considerable reduction in the government’s outstanding borrowing from the banking system during the opening quarter of the current fiscal year, even as demand for credit from the private sector remained subdued.
The decline in government borrowing from banks comes after a year in which the federal government relied heavily on the banking system to meet its financing requirements. During fiscal year 2025-26, government borrowing from banks reached Rs5.49 trillion, reflecting the scale of its funding needs. The government typically raises funds through the sale of market treasury bills and Pakistan Investment Bonds (PIBs), using these instruments to finance the budget deficit and meet other financial obligations. The substantial retirement recorded in the first quarter of FY2027 represents a shift from the previous year’s borrowing pattern, although the extent to which this trend continues will depend on the government’s financing requirements and fiscal position over the remaining months.
Economic experts attributed the reduction in government borrowing partly to an easing in the policy rate and improvements in economic indicators. These developments, according to the experts cited in the report, have helped the government reduce its dependence on commercial banks for financing. Changes in interest rates can influence government borrowing costs and the wider financial environment, while improvements in economic conditions may affect revenue collection, spending requirements and financing decisions. However, the reported figures alone do not establish how much each factor contributed to the repayment of bank borrowing during the quarter.
The SBP data also showed that the federal government continued to repay its outstanding borrowing from the central bank. During July-September FY2027, the government retired Rs728 billion in borrowing from the SBP, compared with Rs1.33 trillion retired during the corresponding quarter of the previous fiscal year. This represents a lower volume of central bank borrowing retirement than in the same period a year earlier, despite the much larger overall reduction in borrowing reported across the banking system. The figures highlight the importance of examining different sources of government financing separately when assessing changes in public-sector borrowing. Commercial bank borrowing and central bank financing form distinct parts of the government’s funding position, and movements in one category do not necessarily match those in another.
While government borrowing declined substantially during the first quarter, private-sector credit activity remained weak. The private sector retired Rs67.76 billion during July-September FY2027, compared with Rs77.41 billion in the corresponding period of FY2026. The figures indicate that businesses and other private borrowers did not generate stronger net demand for bank financing during the quarter. This subdued activity is notable because a reduction in government borrowing can potentially create additional room for private businesses to access credit, depending on banks’ lending decisions, financing costs and the availability of suitable investment opportunities.
Experts cited in the report said the prevailing interest-rate environment and geopolitical uncertainty had weighed on private-sector confidence, discouraging businesses from expanding operations and seeking additional financing. Companies may delay investment decisions when economic conditions remain uncertain or when borrowing costs affect the expected returns from new projects. As a result, lower government borrowing has not yet been accompanied by stronger demand for bank credit from the private sector. The trend suggests that financing conditions alone may not be sufficient to encourage businesses to borrow unless firms also have confidence in future demand, economic stability and the prospects for expansion.
The contrasting movements in government and private-sector borrowing will remain important indicators for Pakistan’s banking sector and wider economy during FY2027. The government’s repayment of Rs2.31 trillion in bank borrowing during the first quarter represents a major change from the financing pattern recorded in the previous fiscal year. However, the continued weakness in private-sector credit demand raises questions about whether businesses will increase investment and borrowing as the year progresses. Market observers will monitor further SBP data on government financing, policy-rate movements and private-sector credit to determine whether the reduction in public-sector borrowing is followed by stronger business activity. Developments in these areas will help provide a clearer picture of credit conditions, investment demand and the direction of Pakistan’s economy throughout the remainder of fiscal year 2026-27.
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