For years, Pakistan’s economic debate has revolved around a single question: when will interest rates come down?
The assumption has been simple: cheaper money will revive industry, restore business confidence and kick-start growth. Yet the latest data from the State Bank of Pakistan tells a far more sobering story, one that validates what many in the business community have been saying for quite some time: lower interest rates, by themselves, are not the solution.
According to SBP figures, private sector bank borrowing plunged by 39 per cent during the first seven months of FY2026, falling to Rs666 billion from Rs1,087 billion in the same period last year. This sharp contraction occurred despite a dramatic reduction in the policy rate – from 22 per cent to 10.5 per cent within a year. If interest rates were the decisive factor, borrowing should have surged. Instead, it collapsed.
This disconnect exposes a deeper structural weakness. In an earlier article (‘What Pakistan needs to fix’, December 27, 2025), I argued that Pakistan’s economic challenges are structural, not cyclical. Today’s numbers reinforce that view. Businesses are not avoiding borrowing because money is expensive; they are avoiding borrowing because the environment in which that money must be deployed is uncertain, costly and unpredictable.
Credit trends within the banking system reveal another telling detail. Conventional banks recorded a net contraction in lending, while Islamic banking branches of conventional banks saw a noticeable increase. This suggests not an expansion of business activity, but a shift in preferences, as firms seek financing structures they perceive as more flexible or aligned with cash-flow realities. It does not, however, point to renewed industrial confidence.
The fundamental problem is that interest is only one cost among many. Pakistani industry continues to struggle with prohibitively high energy tariffs, inconsistent gas supply, rising logistics costs, regulatory unpredictability and an overburdened tax structure. When electricity prices are uncompetitive, raw material imports face delays and policies change mid-stream, even a single-digit interest rate cannot make an unviable business viable.
Monetary easing also does little when demand itself is fragile. With purchasing power under pressure and exports constrained by competitiveness issues, businesses see limited incentive to expand capacity. Borrowing to produce more makes little sense if the market cannot absorb that production profitably.
There is also the question of confidence – or lack of it. Investment decisions are based not only on today’s rates but on expectations of tomorrow. Businesses remain wary of policy reversals, sudden taxation measures and exchange-rate volatility. In such an environment, many prefer to deleverage, conserve cash, or delay expansion rather than take on new obligations, no matter how cheap the financing appears on paper.
To its credit, the government has recently announced a relief package aimed at exporters and industry, which may support borrowing in the months ahead. However, isolated incentives cannot substitute for a coherent, long-term economic strategy. Pakistan’s history is replete with short-lived stimulus measures that delivered momentary relief but failed to produce sustained growth.
What Pakistan truly needs is structural reform – the kind that lowers the real cost of doing business, not just the cost of borrowing. Energy sector reform must be at the top of that list, followed by tax rationalisation, a predictable industrial policy and genuine ease of doing business. Without these, monetary easing risks becoming a cosmetic exercise rather than a catalyst for growth.
The lesson from the latest SBP data is clear: credit does not drive confidence; confidence drives credit. Businesses borrow when they believe the future is stable, rules are predictable, and profitability is achievable. Until those conditions are met, interest-rate cuts will remain necessary but insufficient.
Pakistan cannot afford to chase quick fixes anymore. Sustainable industrial revival will come not from cheaper money alone, but from fixing the fundamentals – governance, energy, productivity and policy consistency. The numbers are not just statistics; they are a warning. And ignoring them would mean repeating the same cycle we have endured for decades.
The writer is a leading Pakistani industrialist. He can be reached at: [email protected]
