KARACHI: Bank lending to the private sector rose sharply for almost nine months of the fiscal year 2025, highlighting increased credit demand from businesses and consumers amid economic recovery and declining borrowing costs.

Between July 1, 2024 and March 21, 2025, banks extended Rs481 billion in loans, marking a 352 per cent increase, or 4.5 times more than a year earlier, according to central bank data published on Thursday.

The latest private sector credit figure is considerably lower than the aggressive lending by banks during the second quarter of FY25. Bank loans totalled Rs1.98 trillion by the end of December as they aimed to avoid taxation related to the advance-to-deposit ratio. However, the State Bank of Pakistan (SBP) noted in its monetary policy statement released last month that private sector credit remains significant at 9.4 per cent, reflecting the effects of ease in financial conditions and ongoing economic recovery.

Saad Hanif, head of research at Ismail Iqbal Securities, said that bank credit to the private sector in Pakistan has increased due to better liquidity conditions, declining interest rates, and a gradual recovery in business confidence. Islamic banks have contributed significantly to this lending growth, while conventional banks have adopted a more cautious approach.

“The shift in government borrowing towards long-term instruments has also helped free up liquidity for private-sector lending. However, overall credit expansion remains slow due to risk aversion among banks, high non-performing loans, and the lagging impact of monetary easing, Hanif added.

“Looking ahead, lending is expected to pick up in the second half of the year, particularly in the manufacturing and energy sectors, while SMEs and retail borrowing may recover at a slower pace,” he noted.

“The extent of growth will depend on further interest rate cuts, macroeconomic stability and banks’ willingness to extend credit.”

Pakistan’s gross domestic product (GDP) grew by 1.73 per cent in the three months ending in December, compared with the same period last year. Growth was revised to 1.34 per cent for the July-September period. The SBP’s GDP growth projection for FY25 is 2.5-3.5 per cent.

The SBP unexpectedly paused its easing cycle last month, keeping the benchmark policy rate at 12 per cent amid concerns about inflation risks stemming from volatile food prices and escalation in global tariffs. The central bank had cut its key interest rate by 1,000 basis points (bps) since June 2024.

Inflation in Pakistan is on a declining trend, and the country’s authorities attribute this decrease to economic stabilisation under the International Monetary Fund’s loan programme. The consumer price index inflation slowed to 0.69 per cent in March, the lowest rate recorded in over seven years.

In 2023, bank lending to the private sector in Pakistan decreased to 12 per cent of GDP, down from 15 per cent in 2022. This figure is significantly lower than Bangladesh’s 38 per cent and India’s 50 per cent. Pakistani banks have increased their focus towards investments in government securities, which surged by 42 per cent in December 2023 and a further 19 per cent in June 2024, with over 95 per cent of their investments concentrated in government securities.

These recent private sector credit statistics come as analysts evaluate the potential impact of US President Donald Trump’s decision to impose sweeping tariffs on US imports. This move threatened to spark a global trade war, which could affect Pakistan’s exports to the US and, in turn, impact the working capital needs of local businesses.

Arif Habib Limited said in a note that President Trump’s latest tariff overhaul is testing the mettle of Pakistan’s export sector. With a staggering 29 per cent duty now imposed on Pakistani goods heading to the US, industries like textiles, food, cement, and others are expected to feel the pressure.

“But amid this tariff storm, Pakistan has a unique chance to pivot, we believe, ie, turning challenge into opportunity. While these tariffs may reduce export competitiveness and strain foreign exchange earnings, Pakistan still holds a cost advantage over key competitors like China, Vietnam and Bangladesh,” it said.