KARACHI: The government’s borrowing from banks in the first half of FY26 has marked a sharp reversal from last year’s pattern, with Rs672 billion raised against net debt retirement during the same period of FY25.

Latest data from the State Bank of Pakistan (SBP) showed that, as the first half of FY26 draws to a close, the government borrowing remains limited to Rs672bn, compared with debt retirement of Rs1.7 trillion in the corresponding period of the previous fiscal year.

Bankers expect heavy borrowing in the second half of the current fiscal year as the government faces liquidity constraints due to revenue shortfalls, which they say remain below target.

Financial market sources said the government continues to rely on banks to stay within its targeted fiscal space. Bankers noted that dividend payouts to the federal government surged sharply in FY25, with around Rs2.7tr transferred to the national exchequer, providing significant fiscal relief.

Another SBP report shows that banks’ investments stood at Rs36.7tr by end-June 2025, underscoring that the bulk of domestic borrowing continues to come from the banking sector.

Rs672bn raised during 1HFY26 in contrast with Rs1.7tr debt retirement

Banks say around 86 per cent of the fiscal deficit is financed through bank borrowing, a factor they believe contributes to weak liquidity flows to the private sector.

In FY25, about 91pc of Pakistan’s total fiscal deficit was financed from domestic sources, with banks playing the dominant role.

Reliance on domestic banks has remained a persistent trend as external financing often falls short of targets.

In FY24, nearly 88pc of deficit financing was raised through domestic markets. FY23 was considered the most challenging year, when external financing pressures pushed the government to rely heavily on bank borrowing to bridge the fiscal gap.

A World Bank report issued on Dec 19 said Pakistan’s path to inclusive and sustainable growth requires stronger mobilisation of domestic resources and more efficient and transparent use of public funds.

The World Bank’s Board of Executive Directors has approved $700m in financing for the Pakistan Public Resources for Inclusive Development – Multiphase Programmatic Approach (PRID-MPA), a multi-year initiative aimed at supporting macroeconomic stability and service delivery.

According to the report, the PRID-MPA will support federal and provincial reforms to mobilise domestic revenue, improve spending quality and leverage data and digital tools for better public services. The programme will provide up to $1.35bn in total financing, including $600m for federal programmes and $100m for Sindh.

“The results-based design ensures that resources are only disbursed once programme objectives are achieved,” the report said.

Published in Dawn, December 26th, 2025