KARACHI: Monetary expansion rose to 4.5 per cent during the first eight and a half months of the fiscal year, compared to just 0.5pc last year, reflecting doubling of government borrowing and excess liquidity in the banking system.

Monetary expansion refers to an increase in the overall money supply within the economy, driven primarily by the government’s heavy borrowing from banks and a cut in the Cash Reserve Requirement (CRR) by the State Bank of Pakistan (SBP).

The SBP slashed the average CRR for banks by 100 basis points, from 6pc to 5pc, effective Jan 30. The decision was taken to boost lending to the private sector and accelerate economic growth. The daily requirement was reduced from 4pc to 3pc, unlocking an estimated Rs300- Rs315 billion in liquidity.

However, the US-Israel war against Iran, which began on Feb 28, changed the entire scenario, affecting the economy — particularly oil and gas prices — and creating uncertainty over the availability of these commodities.

Government’s borrowing from banks doubles in over eight months

Though the government raised additional funds by increasing oil and diesel prices by Rs55 per litre on old stocks, it also borrowed Rs2.453 trillion from banks, compared to Rs1.27tr last year.

The uncertainty caused by the war in the region has further reduced the chances of domestic investment, despite surplus funds available in the market. Despite low inflation, the SBP kept the interest rate unchanged at 10.5pc in the last monetary policy. However, inflation may now increase sharply due to rising oil prices.

The surplus liquidity was created with the aim of stimulating economic growth, but it may now fuel inflation as broad money growth has exceeded economic output.

Monetary expansion during July 1 to March 13 of FY26 was 4.5pc, or Rs1,804.3bn, compared to 0.5pc, or Rs180bn, in the same period last fiscal year.

Latest State Bank data showed that currency in circulation rose to Rs1,103.6bn, compared to Rs691bn in the same period last fiscal year.

Excess liquidity resulting from the lower CRR and a 100pc increase in government borrowing from banks has raised the Net Domestic Assets of the banking system to Rs649bn, compared to negative growth of Rs715bn during the same period last year.

Published in Dawn, March 27th, 2026