The Pakistan government significantly increased its domestic borrowing from commercial banks to bridge fiscal deficits, according to data from the State Bank of Pakistan (SBP). This reliance on domestic debt has surged as the state prioritizes debt servicing over development spending, limiting credit available to the private sector and constraining overall economic growth.
Why is the government borrowing more from commercial banks?
The government uses domestic borrowing to cover the gap between its total expenditure and its actual revenue. Recent SBP weekly statements show a pattern of sharp borrowing spikes toward the end of the fiscal year. This trend occurs as the government rushes to fund budget commitments before the June 30 deadline.
High inflation and the need to maintain foreign exchange reserves under IMF program requirements have tightened the government’s fiscal space. Consequently, the state relies on short-term government securities, such as T-bills, to maintain liquidity. This cycle increases the total domestic debt stock, which continues to climb as the government borrows new funds to pay off old debts.
How does debt servicing impact public development?
Debt servicing now consumes a dominant share of the federal budget, leaving minimal funds for the Public Sector Development Programme (PSDP). According to the Ministry of Finance, a significant portion of the annual budget is earmarked for interest payments on both domestic and external loans.
This creates a fiscal imbalance where debt obligations far outweigh investments in infrastructure, health, and education. When debt servicing costs rise, the government often under-utilizes the PSDP or cuts development projects to avoid further deficits. This lack of investment weakens the economy’s long-term productive capacity.
What is the ‘crowding out’ effect on Pakistan’s private sector?
Commercial banks in Pakistan prefer investing in government securities over lending to private businesses. This phenomenon, known as “crowding out,” occurs because government papers are considered risk-free and often offer higher yields than private loans.
The impact is visible in the credit markets. Banks provide limited credit to the private sector, mostly focusing on short-term working capital rather than long-term industrial expansion. Without access to affordable, long-term financing, local businesses can’t expand operations or invest in new technology, which stifles job creation and industrial growth.
What happens if economic growth stays below 4%?
Economists and financial analysts warn that GDP growth below 4% is insufficient to sustain a growing population or generate the tax revenue needed to reduce the deficit. Low growth creates a vicious cycle: lower revenues lead to more borrowing, which increases debt servicing, further reducing the funds available for growth-inducing investments.
The current economic trajectory suggests that without a shift toward private-sector-led growth and a reduction in the fiscal deficit, the government will remain trapped in a cycle of domestic borrowing. This dependency makes the financial system vulnerable to interest rate volatility and limits the state’s ability to respond to economic shocks.
| Economic Factor | Current Trend | Impact on Economy |
|---|---|---|
| Domestic Borrowing | Increasing | Higher interest burden on future budgets |
| PSDP Funding | Decreasing/Underutilized | Stagnant infrastructure and public services |
| Private Sector Credit | Limited/Short-term | Reduced industrial expansion and job growth |
| Debt Servicing | Dominating Budget | Reduced fiscal space for social spending |
The sustainability of Pakistan’s economy depends on its ability to transition from debt-funded consumption to investment-led growth. Until the government reduces its reliance on commercial banks, the private sector will likely continue to struggle for the credit necessary to drive a meaningful recovery.