Islamabad, Jan 25: Commercial banks in Pakistan have borrowed Rs9.61 trillion from the State Bank of Pakistan (SBP) at an interest rate of 13.04% for a seven-day period, as reported by the central bank on Friday. However, the SBP did not receive any bids for fresh borrowing for the longer 28-day period.
Interest Rate Expectations and Impact
Analysts anticipate that the SBP may reduce its key policy rate by 1 percentage point, bringing it down to 12% following a series of rate cuts, totaling 9 percentage points since June 2024. If this rate cut is implemented, it would lower borrowing costs for commercial banks, allowing them to acquire additional funds at reduced rates after the upcoming monetary policy review.
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Purpose of Borrowing
Commercial banks usually borrow from the SBP in 7-day and 28-day periods to manage liquidity and meet funding requirements for governments, businesses, and individuals. A significant portion of this borrowing is used to refinance federal and provincial governments, enabling them to meet fiscal obligations such as:
- Repaying maturing debt
- Making interest payments
- Covering salaries and pensions, particularly when tax revenue collections are insufficient.
SBP’s Role in Government Borrowing
Under conditions set by the International Monetary Fund (IMF), local governments are barred from directly borrowing from the central bank. Instead, the SBP provides financing to commercial banks, which then lend to the government to help cover their financial needs. This arrangement has become a critical tool for managing fiscal deficits, especially amid low tax revenue generation by the Federal Board of Revenue (FBR), which falls short of meeting the fiscal demands at both the federal and provincial levels.
This continued reliance on borrowing underscores the ongoing challenges in Pakistan’s revenue collection and fiscal management.
