Whenever the conversation turns to reviving the economy, we look in one direction: the federal government. A subsidy here, a development-spending push there, a tax break to coax investment. Under the current International Monetary Fund programme, however, Islamabad is committed to running primary surpluses, winding down concessional schemes, and keeping its hands off the interventions that used to pass for industrial policy. The fiscal engine of growth, for now, is throttled.

But it is not the only engine. There is a second one, sitting mostly idle, in the private sector.

Commercial banks hold north of $140 billion in deposits. Of every rupee held with them, they lend out only forty paisas. If banks lifted that ratio by even five per cent to 10pc, that would push between Rs2tr and Rs4tr into productive lending. That is a stimulus on the scale of a major public spending programme, except that it would cost the exchequer nothing. It is existing liquidity redirected from financing the state to financing the real economy. And because it better uses existing money rather than create new money, it works with the grain of a tight monetary policy.

The banks are not holding back because they lack capital. Productive lending simply cannot compete with a government bond on a risk-adjusted basis. The bond pays well, costs nothing in capital, and never defaults. Meanwhile, a project loan demands underwriting, ties up the balance sheet for years, and carries real risk of loss. We have also learnt that a balance sheet cannot be scolded into taking risk it is not paid to take. The durable answer therefore is to change the relative economics of productive lending.

Banks, with their $140bn balance sheets, could put in considerably more effort for lending, especially within a productive climate-smart framework

Of all the directions that lending could take, climate and green financing is the natural wedge. Pakistan is among the world’s most climate-exposed economies. There is policy momentum behind the transition, and access to international concessional finance that does not exist for generic lending, including facilities linked to the International Monetary Fund (IMF) arrangement.

The State Bank has already laid the intellectual groundwork with the Green Taxonomy, a rulebook that defines what counts as a genuinely green asset. The trouble is that the taxonomy tells a bank how to label and disclose a green loan. It does nothing to change whether that loan gets made in the first place.

There are several ways to close that gap.

The first is capital treatment, that is, giving qualifying green assets a lighter risk weight, as Europe did for small-business lending. Useful, but in a system where capital is not the constraint, this is more a signal of prudential intent than a mover of money.

The second is concessional funding, which is the lever that moved billions elsewhere. China refinances a large share of qualifying green loans at rates well below the market. Bangladesh, our closest structural peer, runs concessional green refinancing and disbursement targets. The catch for us is that the central bank can no longer be the source.

Under the IMF programme, the State Bank is exiting its refinance schemes by 2028, with that role passing to the Exim Bank and the fiscal side. So this lever has not disappeared as such, but relocated from monetary policy to a development-finance channel.

The third, and most immediately available, lever is prudential plumbing, through recognising green collateral so that financing green equipment carries a lower cost of risk, thereby letting green bonds count toward the statutory liquidity reserve. These are quiet, technical changes, but they directly improve the economics of a green loan relative to a government bond, which is the whole game.

Running alongside all of this is de-risking, via partial guarantees and blended finance that absorb the first slice of loss, because expected loss is what a lending decision actually turns on.

None of this is foreign to how the State Bank thinks. It already applies differentiated capital treatment across asset classes and has decades of experience directing credit toward priority sectors. Extending that logic to green assets is an evolution, not a revolution.

The regional direction of travel is unmistakable. From Beijing to Dhaka, central banks and treasuries are wiring climate priorities into the machinery of finance. Pakistan, with its acute exposure and its published taxonomy, is better positioned than most to follow and adapt the model to its own constraints.

Fiscal space will return slowly, if at all. But growth does not have to wait. There is a $140bn balance sheet that could do considerably more work than it does, and a framework already on the books to point it in a direction that is both productive and climate-smart. What is missing is the wiring, being the set of incentives that makes the safe, productive choice also the profitable one. Pakistan cannot afford to leave that engine idling.

The writer is a climate finance consultant

Published in Dawn, The Business and Finance Weekly, June 29th, 2026