KARACHI: After months of steadily repaying loans, the private sector in Pakistan has reversed its trend and substantially increased borrowing from banks during April, mainly to address working capital requirements.
According to data released by the State Bank of Pakistan (SBP), lending to the private sector reached Rs751 billion as of May 2, indicating a marked increase from earlier months.
This shift comes after a period of debt reduction that followed a major lending surge at the end of last year.
By December 31, 2024, banks had extended Rs1.4 trillion in loans to the private sector. A large portion of that credit was repaid in subsequent months, reflecting cautious business sentiment and tight liquidity management.
The previous increase in bank lending was partially fueled by financial institutions attempting to comply with the Advance-to-Deposit Ratio (ADR) requirements, aimed at avoiding an additional 15% incremental tax for under-lending.
The resurgence in borrowing has been aided by a sharp shift in monetary policy. Since June 2024, the central bank has progressively reduced the benchmark policy rate from 22% to 11%, as inflation has rapidly cooled.
Notably, inflation in April dropped to a historic low of just 0.3%, creating favorable conditions for businesses to resume borrowing.
Banking industry insiders attribute the increased borrowing to both the significantly lower interest rate environment and gradual improvement in macroeconomic indicators.
However, they also caution that the scale of borrowing remains below government expectations for a robust economic rebound.
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With the interest rate now at 11%, many sectors of trade and industry view the cost of financing as more manageable.
Certain industry leaders have expressed measured support for the SBP’s recent 100-basis-point reduction in its monetary policy statement, which will remain in effect for two months.
However, major business organizations, including top trade and commerce chambers, continue to argue that a single-digit policy rate is essential to meaningfully stimulate economic activity and investment.
Compared to the same period last year, the private sector’s borrowing has grown significantly.
As of early May 2024, private-sector borrowing stood at just Rs239.8 billion, highlighting the extent of this year’s rebound.
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Economic analysts note that the recent spike in credit is likely concentrated in short-term working capital financing, rather than long-term investment loans, suggesting that businesses are focused on managing day-to-day operations amid still-cautious growth prospects.
