KARACHI: More taxes and more borrowings from banks have been helping the government to continue with higher spending in FY26 against the IMF’s suggestion for a cut in expenses.
The latest data released by the State Bank showed that the federal government borrowed heavily from banks during the first 11 months of the current fiscal year.
According to sources in the financial sector, the borrowing would be much higher during the closing days of FY26.
During the last quarter of fiscal year FY25, the government’s domestic debt rose by Rs2.954 trillion.
The data showed that the government borrowed Rs3.5tr from banks in 11MFY26. The private sector is the ultimate sufferer as it received just Rs986bn during the period.
The government has been announcing measures to promote housing finance, accelerate the growth of Small and Medium Enterprises (SMEs), and push the private sector to boost economic growth. But aside from the rhetoric, there has been no follow-up action.
Credit to SMEs or non-bank financial institutions witnessed a net debt retirement of Rs362bn against a borrowing of Rs423bn in the same period last year.
The government is facing a revenue shortfall, compelling it to borrow more or tax more. The total revenue collection stood at Rs11.232tr in 11MFY26 against a revised target of Rs11.257tr for the same period, suggesting that the shortfall is being offset through higher petroleum levy receipts.
“June is the closing month; all dues are cleared, and vast liquidity is required to make payments this month. The only way is to borrow more from banks; there is no limit for the government to borrow from banks,” said a senior banker.
Opportunity for banks
A liquidity shortage is a golden opportunity for banks to earn risk-free windfall profits, as they have been doing for the last several years. The government borrowed Rs5.434 trillion from banks in FY25, down from Rs8.519tr in FY24.
Compared with FY24 and FY25, the government still has sufficient room to borrow more from banks.
The central bank lowered the cash reserve requirement (CRR) for banks from six to five per cent, effective Jan 30, to promote greater private sector lending; however, the private sector remained content with short-term working capital.
According to the third IMF review under the Extended Arrangement issued on May 14, the end-December primary balance target was met with a comfortable margin. And a primary surplus of Rs4.1 trillion (3.2pc of GDP) was recorded in FY26H1 against an adjusted programme target of Rs3.3tr (2.5pc of GDP), mainly on account of “expenditure compression”.
Published in Dawn, June 7th, 2026
