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KARACHI: The share of banks financing the budget deficit fell to 74 per cent in the fiscal year that ended in June 2025 from nearly 100 per cent in FY24, resulting in a more than twofold increase in loans to private businesses, according to the central bank report released on Friday.

Banking sector assets expanded to nearly 52.4 per cent of gross domestic product (GDP) in FY25, up from 49.1 per cent in the previous year, said Governor’s Annual Report for FY25 of the State Bank of Pakistan.

The assets of the banking sector grew at 15.3 per cent in FY25.“The major driver of the growth in assets of the banking sector remained investments, particularly in government securities,” the SBP’s report said.

“However, owing to lower financing needs due to fiscal consolidation, availability of the non-bank as well as external financing, the share of banks in financing the budget deficit reduced to 74 per cent in FY25, compared to almost 100 per cent in FY24,” it added.

“In this backdrop, the private sector credit (PSC) off-take more-than- doubled during FY25, compared to FY24, as the improvement in economic activity and business confidence amid falling interest rates increased credit demand in the country.”

In contrast to banking sector assets, the sector’s deposit growth slowed, whereas the currency-in-circulation expanded amid rising domestic uncertainty due to regional conflict, the report said.

The disinflationary trend that began in FY24 became more pronounced during FY25. Average National CPI inflation dropped sharply to 4.5 per cent from 23.4 per cent in FY24 and 29.2 per cent in FY23, according to the report.

The SBP said it reduced the policy rate by a cumulative 1,100 basis points (bps) between June 2024 and June 2025. However, due to lingering uncertainties — including sticky core inflation during H2-FY25, evolving global trade tariffs, rising geopolitical tensions, and volatility in administered energy prices — the Monetary Policy Committee (MPC) slowed the pace of monetary easing in the second half of FY25.

The report noted that this measured stance facilitated a notable expansion in private sector credit and supported a gradual recovery in economic activity, especially in the latter part of the fiscal year. With the fiscal deficit narrowing to a multi-year low of 5.4 per cent of GDP, and the primary surplus more than doubling to 2.4 per cent, fiscal consolidation supplemented the monetary policy stance to help bring inflation down, the report said.

The significant improvement in the external sector, with the current account balance (CAB) posting a surplus for the first time in over fourteen years. The CAB surplus, combined with increased financial inflows following the IMF’s Extended Fund Facility programme, enabled SBP to conduct significant foreign exchange purchases from the interbank market that strengthened foreign exchange reserves and enhanced FX market stability.

The report highlights several measures taken by the SBP as part of its tertiary objective to support the government’s economic policy objectives. In particular, it highlights various exchange company reforms and administrative measures to boost workers’ remittances — such as enhanced incentives for banks, and targeted outreach to the diaspora — as well as measures to facilitate exporters, particularly in the IT sector, through enhanced retention limits to promote reinvestment and innovation.

The report notes the establishment of Raast Payments Pakistan (Pvt) Ltd to oversee the operations and governance of the Raast system, the launch of the enhanced PRISM+ settlement system with integrated central securities depository features, and the introduction of a regulatory sandbox framework for payment innovation. Additionally, the SBP implemented digital payment acceptance solutions nationwide along with the further digitisation of government payments.