State Bank

Banks in the country remain heavily reliant on government borrowing for profits, with federal government borrowing from banks rising to Rs5.9 trillion in FY26. Private sector lending remains limited, receiving only Rs1.4 trillion, while the advance-to-deposit ratio fell to 35.2%, reflecting weak private sector growth.

The government approved Rs255 billion in subsidies for exporters, potentially violating IMF program commitments that prohibit new fiscal incentives. Two schemes, the Long-Term Export Growth Financing Facility and the repackaged Exim Bank Export Finance Scheme (E-EFS), breach IMF restrictions on subsidies and guaranteed returns, despite claims of compliance with quantitative caps.

The Gulf war has disrupted Dubai's informal trading, reducing unaccounted dollar inflows through Pakistan's hundi and hawala networks, which harms small exporters and domestic manufacturers. Crypto investments are now diverting billions from the local market, with dollar outflows reported through illegal channels.

Prime Minister Shehbaz Sharif warned that renewed US-Iran tensions could negatively impact Pakistan's economy, while reviewing austerity measures and economic preparedness. He highlighted the country's stable economy, public support for conservation efforts, and government actions to manage fuel supply challenges.

Pakistan's government repeatedly urges banks to increase lending to SMEs, but progress remains stagnant due to perceived risks and banks' preference for safer government loans. Despite initiatives like the Access to Finance Plan aiming to boost SME credit access, banks cite challenges like weak legal enforcement and lack of SME financial data, while prioritizing low-risk government securities.

Pakistan's economic debate focuses on the inefficiency of government spending versus private investment, with private investment generating higher returns but stagnant productivity preventing compounding growth. The article highlights low productivity in Pakistan compared to India, Vietnam, and Bangladesh, and suggests reforms like export discipline, skills development, and technology adoption for SMEs to improve output per rupee.

The article argues that devaluing the rupee to boost exports is ineffective due to high import dependency in production. Research shows exports respond weakly to exchange rate changes, and 37% of export value relies on imported inputs. Structural issues like energy costs, productivity, and trade facilitation are highlighted as critical factors, contrasting with examples of Vietnam and South Korea's success through diversification and reforms.

Regional instability in the Gulf is negatively impacting Pakistan's economic outlook, causing declines in foreign direct investment, domestic bond inflows, and foreign equity investments in FY26. Pakistan faces a $35bn trade deficit and relies heavily on remittances, while analysts warn that Gulf tensions could deter foreign investors despite growing diplomatic ties with Gulf nations.