By Abdul Ghani

Pakistan's improved fiscal position is reducing the government's reliance on bank borrowing, creating greater space for private sector credit and investment as the economy enters FY2026-27, according to the Finance Division.

The Finance Division's Monthly Economic Update & Outlook (June 2026) states that government borrowing for budgetary support declined significantly during the current fiscal year, reflecting improved fiscal discipline and stronger revenue mobilisation. The report says the shift is expected to improve credit availability for businesses and support private sector-led economic growth.

According to the report, government borrowing from the banking system for budgetary support fell to Rs1.80 trillion from July 1, 2025, to June 12, 2026, compared with Rs3.21 trillion during the corresponding period of the previous fiscal year. The sharp decline reflects the government's continued efforts to strengthen public finances through higher revenues and prudent expenditure management.

At the same time, private sector credit continued to expand. According to the Finance Division, borrowing by the private sector increased to Rs873.3 billion during the period, up from Rs676.6 billion a year earlier. The report indicates that stronger credit demand reflects improving business confidence and increased investment activity as macroeconomic conditions stabilise.

The report also highlights improving liquidity conditions in the banking system. Broad money (M2) expanded by 9.2%, equivalent to Rs3.73 trillion, during the reporting period, while both the banking system's Net Foreign Assets and Net Domestic Assets recorded substantial increases. These developments have strengthened banks' capacity to finance productive sectors of the economy.

According to the document, Pakistan's fiscal consolidation has been accompanied by stronger revenue collection and lower current expenditure, particularly debt servicing costs. The overall fiscal deficit narrowed significantly during FY2025-26, allowing the government to reduce its financing requirements while maintaining development spending.

The report notes that easing pressure from government borrowing can improve the allocation of financial resources by allowing banks to extend more credit to businesses engaged in manufacturing, agriculture, exports and services. Increased access to finance is expected to encourage investment, production expansion and job creation across the economy.

According to the Finance Division, continued macroeconomic stability, prudent fiscal management and strengthening external sector indicators are expected to reinforce confidence in the financial system. These conditions are likely to support further expansion in private sector lending during FY2026-27.

The report concludes that lower government borrowing, together with improved liquidity and stronger banking sector balance sheets, provides a favourable environment for greater private sector participation in economic growth. As investment activity strengthens, higher private sector credit is expected to play an increasingly important role in sustaining Pakistan's economic recovery.

Credit: INP-WealthPk