KARACHI: Credit in the banking system, particularly domestic lending to the private sector across agriculture, manufacturing, and services, is expanding in Pakistan, but this expansion is not adequately supporting the manufacturing sector, according to research from the Institute of Cost and Management Accountants of Pakistan (ICMA).
Pakistan’s macroeconomic conditions are showing signs of stabilisation, supported by moderate growth recovery and improved external buffers, though the outlook remains fragile amid inflationary pressures and global uncertainties,” the ICMA said in the statement. Within this environment, the ICMA highlights that the more critical issue lies in the allocation of private sector credit rather than its overall availability.
The State Bank of Pakistan (SBP) raised its policy rate to 11.5 per cent on Monday to contain inflationary pressures and respond to rising global uncertainty linked to the prolonged Middle East conflict. While the stance aims to stabilise prices and anchor expectations, the ICMA notes that credit flows remain misaligned with sectoral growth dynamics.
Macroeconomic indicators remain broadly stable, with GDP growth at 3.8 per cent in the first half of FY26, a current account surplus during July to March FY26, and foreign exchange reserves rising to $15.8 billion, supported by external inflows and improved financial conditions. However, the ICMA cautions that this stability coexists with structural weaknesses in credit allocation that may limit medium to long-term growth potential.
The analysis is based on the Sectoral Credit Transmission Gap framework, an expanded version of the ICMA’s earlier Manufacturing Credit Transmission Gap model presented on March 10, 2026. The framework compares sectoral private credit growth with sectoral output growth to assess whether financial flows are aligned with real economic activity. It is consistent with methodologies used by the Bank for International Settlements and the International Monetary Fund under Basel III financial stability frameworks.
In simple terms, when credit grows faster than output, it signals possible inefficiency. When output grows faster than credit, it indicates underfinancing. When both move together, allocation is broadly balanced.
Applied to Pakistan, the results show clear sectoral divergence. Agriculture shows credit growth exceeding output growth, which the ICMA cautions may reflect timing effects linked to crop cycles rather than immediate inefficiency, but it requires close monitoring of credit utilization and productivity outcomes.
Manufacturing presents a more noticeable imbalance, with strong output growth of around five to seven percent in some periods but persistently weak credit support, indicating a structural underfinancing of the most productive and employment-generating sector. Services remain broadly balanced, with credit and output largely aligned, reflecting relatively efficient allocation.
The ICMA emphasises that monetary policy is most effective when private sector credit flows support productive sectors. However, in Pakistan, this alignment remains incomplete. International evidence from the International Monetary Fund and the Bank for International Settlements shows that inefficient credit allocation reduces productivity, slows growth, and increases financial vulnerabilities.
The institute cautions that monetary tightening alone is not sufficient to ensure sustainable growth. A more targeted and productivity-driven approach to private sector credit allocation is essential to support industrial expansion, improve efficiency and strengthen long-term macroeconomic stability.
