By Abdul Ghani

Pakistan’s private sector credit growth slowed sharply during the first half of FY26, even as economic activity improved and borrowing conditions eased, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report said private sector credit grew by only 0.9 percent year-on-year by end-December 2025, compared with 22.8 percent in the same period last year. In absolute terms, private sector credit expanded by Rs992.3 billion in H1-FY26 against Rs1,978.9 billion in H1-FY25.

The SBP attributed the sharp slowdown mainly to a high base effect from last year, when banks had significantly increased lending to the private sector to avoid the advances-to-deposit ratio-based tax.

The moderation in credit growth does not necessarily point to a collapse in loan demand. The report noted that traction in economic activity, lower input costs and easing financing conditions contributed to an uptick in private-sector credit demand during H1-FY26. On the supply side, higher bank deposits improved the availability of loanable funds.

The improvement in broader economic conditions provided a more supportive backdrop for firms. Real GDP growth rose to 3.8 percent in H1-FY26 from 1.9 percent a year earlier, while industrial growth accelerated to 8.1 percent from 0.5 percent. Large-scale manufacturing also recovered, growing 4.8 percent after contracting in the comparable period last year.

Lower borrowing costs helped improve the credit environment. The SBP reduced the policy rate by 50 basis points in December 2025, taking the cumulative reduction since June 2024 to 1,150 basis points.

However, the banking system also faced tighter liquidity conditions during the period. Currency in circulation increased because of higher remittances, stronger transaction demand and withholding tax on cash withdrawals for non-filers. At the same time, higher government borrowing from scheduled banks and expansion in credit to the non-government sector strained interbank liquidity.

The SBP said it actively addressed the liquidity shortfall through open market operations. Improved liquidity management helped reduce volatility in the weighted average overnight repo rate and strengthened monetary policy transmission.

The slower pace of private-sector credit growth also reflects the uneven nature of Pakistan’s recovery. While industry and services improved, businesses remained cautious because of uncertainty surrounding energy prices, geopolitical risks and global trade conditions.

The report warned that the war in the Middle East could affect inflation, external trade, remittance flows and economic activity in Pakistan through higher oil prices, freight charges and supply chain disruptions.

For businesses, the credit environment remains mixed. Lower interest rates and improved macroeconomic stability have reduced financing pressures, but uncertainty over import costs and external demand may delay long-term investment decisions.

The SBP’s assessment suggests that sustained credit growth will depend not only on lower borrowing costs but also on deeper structural reforms that improve productivity, strengthen competitiveness and create a more predictable investment climate.

The report noted that Pakistan’s transition to a sustainable high-growth path requires addressing chronic weaknesses, including low savings and investment, weak competitiveness, falling exports as a share of GDP, subdued foreign direct investment and a persistently low tax-to-GDP ratio.

Credit: INP-WealthPk