Moaaz Manzoor

Increased investment by banks in government securities has limited credit availability for businesses, constraining industrial revival, job creation, and long-term private sector growth.

Speaking to WealthPK, Muhammad Waqas Ghani, Head of Equity Research at JS Global Capital, explained, “Although banks briefly increased lending to avoid punitive ADR-based taxes last calendar year, most of that lending was short-lived and strategic. Once the tax threshold was waived, private-sector credit declined again. The enduring preference remains that risk-free government securities deliver better returns, and structural constraints keep private credit growth low.”

This trend is evident in the State Bank of Pakistan’s latest data, which shows government borrowing from banks surged by Rs8.5 trillion in FY24 alone, pushing total bank lending to the government above Rs44 trillion. Meanwhile, credit to the private sector barely grew from Rs46 billion in FY23 to Rs513 billion in FY24 and Rs742 billion so far in FY25, illustrating how slowly capital is trickling into productive enterprises.

Financial expert Hasan Saeed reinforced this view, noting, “The Rs44 trillion invested in government securities signals a clear preference for risk-free returns, diverting capital away from real-sector investment. This crowding out is particularly damaging as large-scale manufacturing contracts, stalling industrial recovery and job creation.”

This “crowding out” effect, where government borrowing absorbs the bulk of available financial resources, has left many firms, especially in manufacturing, unable to secure affordable credit for expansion and technology upgrades. As a result, GDP growth has averaged just 1.7% over the past three years, well below the level required to meet the needs of a population of 241 million.

Meanwhile, Pakistan’s total public debt has ballooned to Rs76 trillion, Rs53.5 trillion in domestic liabilities, and Rs22.6 trillion in external debt. Hence, Pakistan’s credit markets are skewed toward government borrowing, limiting access to financing for private enterprises.

Experts warn that without reversing this imbalance, economic recovery will remain fragile. Redirecting capital toward the real sector is crucial to generating jobs, stimulating production, and supporting long-term growth amid rising fiscal and demographic pressures.

Credit: INP-WealthPk