Moaaz Manzoor

 Pakistan’s monetary conditions showed signs of stabilization during the first half of fiscal year 2025–26, as easing inflationary pressures and improved external balances allowed room for calibrated policy support, according to the Monthly Economic Update and Outlook for December 2025 issued by the Finance Division.

The report noted that the State Bank of Pakistan (SBP) reduced the policy rate by 50 basis points to 10.5 percent during December 2025, reflecting increased confidence in the disinflationary trend and the improving macroeconomic environment. The easing of the policy rate was aimed at supporting economic activity while maintaining price stability amid a moderating inflation outlook.

Monetary aggregates showed mixed trends during the review period. Broad money (M2) recorded a contraction of 0.1 percent during July–November FY2026, compared to a contraction of 1.1 percent in the same period of the previous year. The moderation in contraction reflected changing liquidity dynamics within the banking system as economic activity gradually picked up.

The report highlighted that net foreign assets (NFA) of the banking system increased by Rs142.9 billion during the period, reversing earlier declines and reflecting improved external inflows. In contrast, net domestic assets (NDA) declined by Rs168.2 billion, largely due to reduced government borrowing from the banking system. This shift indicated improving fiscal discipline and lower reliance on domestic financing.

Government borrowing patterns also reflected tightening fiscal management. During July–November FY2026, the government retired Rs804.7 billion in net borrowing from the banking system, compared with a much larger retirement of Rs2,166.9 billion during the same period last year. The moderation in borrowing requirements was linked to better revenue performance and controlled expenditure.

Private sector credit, however, remained subdued during the period. Credit to the private sector amounted to Rs186.8 billion, significantly lower than the Rs1,300.7 billion recorded in the same period last year. The report attributed this moderation to cautious lending behavior by banks, higher risk aversion and selective credit expansion amid changing economic conditions.

The Finance Division noted that the evolving monetary conditions reflected a balance between supporting economic recovery and maintaining financial stability. The easing of the policy rate was intended to stimulate investment and consumption without reigniting inflationary pressures.

Looking ahead, the report emphasized that monetary policy would continue to be guided by inflation trends, external sector developments and overall economic activity. The central bank’s focus, it said, would remain on maintaining price stability while ensuring adequate liquidity to support sustainable growth in the economy.

Credit: INP-WealthPk