Qudsia Bano

Broad money supply in Pakistan surged by 14% year-on-year as of July 11, 2025 compared to 12.6% recorded at the time of the last Monetary Policy Committee (MPC) meeting. Experts have linked this acceleration primarily to a boost in foreign exchange reserves and easing financial conditions, which have also supported a notable rise in private sector credit.

Dr Amna Tariq, Senior Economist at the Pakistan Institute of Development Economics (PIDE), explained that the expansion in money supply reflects a marked improvement in external sector stability. "The increase in Net Foreign Assets (NFA) of the banking system has played a significant role in driving broad money growth. This improvement is a direct outcome of stronger foreign exchange inflows, which have helped the central bank maintain liquidity and stabilise the rupee," she said.

She noted that the pickup in credit growth is also closely tied to rising economic activity, which appears to be broad-based across sectors. “The growth in credit to the private sector at 12.8% year-on-year is significant. It indicates a return in business confidence and the impact of relatively accommodative monetary conditions. More importantly, the growth is not concentrated in one area but spans working capital loans, fixed investment, and consumer financing,” Amna added.

According to data released by the State Bank of Pakistan, borrowing activity increased across sectors such as textiles, telecommunications, and wholesale and retail trade, pointing to a diversified credit expansion. Amna warned, however, that the central bank would need to closely monitor inflationary pressures as money supply grows, particularly in light of the recent uptick in currency-to-deposit ratio, which rebounded in July after a decline in June.

Naeem Hassan, Research Fellow at the Applied Economics Research Centre (AERC), University of Karachi, emphasised that the increase in broad money and credit growth should be viewed in the context of policy-driven liquidity injections. "The SBP’s enhanced liquidity support was necessary to align the interbank overnight repo rate with the policy rate. This move, while supportive of short-term growth, has also led to higher reserve money growth, which has monetary implications down the line," he explained.

He further added that the revival in private sector lending is a positive signal for economic recovery, but the momentum must be sustained through policy consistency. “Access to credit is expanding at a time when businesses are attempting to recover from multiple years of macroeconomic challenges. For sectors like textiles and telecom to continue investing, they need confidence in predictable fiscal and monetary frameworks,” said Hassan. While monetary indicators are showing signs of resilience, Hassan highlighted the need for caution.

“Liquidity-driven growth is effective in the short-term, but if not paired with structural reforms and export-led investment, the benefits could be short-lived,” he concluded. With foreign exchange reserves improving, the State Bank has had more room to accommodate growing credit needs. However, as economic activity accelerates, monetary authorities will need to carefully balance liquidity support with inflation control, particularly as external demand conditions and domestic consumption patterns evolve.

Credit: INP-WealthPk