Abdul Ghani

Pakistan’s monetary indicators showed a clear improvement during the first half of FY2026, with money supply expanding and private sector credit gaining momentum, reflecting improving business conditions and a gradual pickup in economic activity, according to the Monthly Economic Update and Outlook released by the Finance Division.

Official data show that broad money (M2) increased by 3.7 percent during Jul–Dec FY2026, a notable turnaround from a contraction of 0.7 percent recorded in the corresponding period of the previous fiscal year. The expansion in money supply indicates easing liquidity conditions in the banking system and improving financial intermediation amid stabilising macroeconomic indicators.

A breakdown of monetary aggregates shows that Net Domestic Assets (NDA) of the banking sector increased by Rs1,406.5 billion during the first half of FY2026, compared to a contraction of Rs934.7 billion in the same period last year. The expansion in NDA was the primary driver of overall money supply growth, reflecting higher credit flows to the private sector and reduced reliance on government borrowing.

In contrast, Net Foreign Assets (NFA) of the banking system increased by Rs107.9 billion during Jul–Dec FY2026, significantly lower than the increase of Rs667.3 billion recorded in the same period last year. The relatively modest rise in NFA reflects external sector dynamics, including a shift in the current account into a deficit and lower net foreign inflows during the period.

Government borrowing trends also showed improvement. During Jul–Dec FY2026, the government retired Rs347.0 billion in borrowing for budgetary support, compared to a much larger retirement of Rs2,215.4 billion in the corresponding period last year. The continued retirement of government borrowing helped ease pressure on the banking system and created space for increased private sector credit.

Private sector borrowing reached Rs992.3 billion during Jul–Dec FY2026, compared to Rs1,978.9 billion in the same period last year. While the absolute level of borrowing was lower than last year’s unusually high base, the Finance Division noted a qualitative shift in the composition of credit demand. Demand for fixed investment loans by businesses increased to Rs257 billion during the period, signalling renewed interest in long-term investment and capacity expansion.

The report highlighted that higher private sector credit during the first half of FY2025 was partly driven by compliance with the Advance-to-Deposit Ratio (ADR) requirements, whereas credit growth in FY2026 reflects more organic demand for financing linked to improving economic activity. The shift toward fixed investment loans suggests that businesses are increasingly positioning themselves for sustained growth rather than solely for short-term working capital needs.

Improved liquidity conditions and stabilising inflation have supported the expansion in monetary aggregates. Headline inflation eased to 5.6 percent in December 2025, helping reduce uncertainty and improve predictability for borrowers and lenders. The easing inflationary environment has also supported credit flows by lowering real financing costs and improving repayment capacity.

The Finance Division said that current monetary and capital market indicators point to an improving business environment, with the expansion in the money supply and private sector credit expected to support large-scale manufacturing and broader economic growth in the coming months. The report noted that continued monitoring of credit flows and liquidity conditions will be essential to ensure that monetary expansion remains aligned with growth and inflation objectives.

The pickup in the money supply and private sector borrowing during Jul–Dec FY2026 forms a key component of the broader economic recovery narrative, complementing easing inflation, improving fiscal indicators, and strengthening industrial activity. The Finance Division indicated that sustained improvements in monetary conditions could help reinforce growth momentum during the remainder of FY2026.

Credit: INP-WealthPk