KARACHI: In a surprising move, the private sector has repaid nearly 48 percent of the debt borrowed from banks within a month, indicating a lack of new projects or ventures being pursued despite lower interest rates. From July 1, 2024, to January 17, 2025, the private sector borrowed a substantial Rs1.398 trillion from banks. However, much of the lending that occurred during the final months of 2024, particularly in November and December, was driven by banks’ efforts to avoid penalties related to failing to meet the 50 percent advance to deposit ratio (ADR).
Recent data from the State Bank of Pakistan (SBP) reveals that the rapid withdrawal of funds indicates a temporary arrangement designed to circumvent tax liabilities. The figures suggest that while funds were lent out, the private sector appears unprepared to utilize these loans for new investments or projects. As of January 17, 2025, total lending to the private sector stood at Rs1.398 trillion, but by February 24, this amount had decreased by almost half to Rs742 billion.
The swift repayment of Rs656 billion (48.3 percent) within a month is seen as a sign that banks’ lending during the final months of 2024 was driven more by the need to meet regulatory requirements than by genuine demand from the private sector. This suggests that the private sector’s participation in the economy is likely to remain subdued, as evidenced by the cautious approach taken in utilizing borrowed funds.
This situation is particularly noteworthy as borrowing conditions should theoretically be more favorable for the private sector. Since June 2024, the State Bank of Pakistan has slashed interest rates by 1,000 basis points, bringing the rate down to 12 percent. Despite this significant reduction, the private sector has not exhibited the expected level of borrowing activity, reflecting a broader sense of economic uncertainty and lack of confidence in undertaking new ventures.
Meanwhile, government spending on development projects is also falling short of expectations. The Public Sector Development Programme (PSDP) has been severely reduced, with spending in the first half of the fiscal year 2024-2025 amounting to just Rs148 billion—only 10.5 percent of the originally planned Rs1.4 trillion budget. This reduction in government spending, coupled with a revenue shortfall of Rs386 billion, further dampens growth prospects for Pakistan, with both public and private sector expenditures failing to meet the targeted 3.2 percent GDP growth for FY25.
In terms of liquidity, the country’s domestic borrowing has risen by Rs2.723 trillion to Rs49.883 trillion in the first half of FY25, with the government receiving Rs2.7 trillion from the State Bank as profit. Despite this influx, the continued liquidity shortage, combined with underperforming PSDP spending, threatens to derail Pakistan’s economic growth objectives.
On the banking front, institutions appear reluctant to take risks, with many banks opting to invest their available liquidity in government bonds rather than lending to the private sector. The prevailing uncertainty, especially regarding political stability and potential disruptions from the ongoing US-China trade war, is contributing to this cautious stance. According to senior banker S.S. Iqbal, there is no clear policy to mitigate the risks arising from external economic challenges, including economic slowdowns in Europe.
Interestingly, Islamic banks have shown more aggressive lending behavior, with their share of lending to the private sector amounting to Rs550 billion as of February 14, 2025. In comparison, conventional banks have lent only Rs142 billion, with the Islamic branches of these conventional banks contributing an additional Rs50 billion. This trend highlights the growing prominence of Islamic banking institutions in Pakistan’s financial landscape, especially as they demonstrate a greater willingness to manage liquidity within the private sector.
The overall economic picture remains uncertain, with both public and private sector spending struggling to meet growth targets. As the situation unfolds, the private sector’s cautious borrowing behavior coupled with the government’s fiscal challenges could hinder Pakistan’s ability to reach its desired economic growth in FY25.