Government's Rs1.19 Trillion Bank Borrowing in 1HFY26: A Fiscal Reversal

The federal government relied heavily on bank borrowing during the first half of the current fiscal year, raising a net Rs1.192 trillion from scheduled banks, despite posting year on year growth in tax revenues. Data show that in the corresponding period last year, the government had instead retired Rs1.255 trillion in bank debt, highlighting a sharp reversal in its fiscal position. The borrowing trend indicates that government spending during July to December FY26 exceeded levels recorded in the same period a year earlier. During the first six months of FY26, the Federal Board of Revenue collected Rs6.159 trillion, falling short of its target of Rs6.490 trillion by Rs331 billion. However, collections were still 10 percent higher than the Rs5.618 trillion recorded in the same period last year. The increased borrowing has raised questions, particularly in light of the State Bank’s reported net profit of Rs2.5 trillion for FY25, which was transferred to the federal government. Despite this sizeable inflow, the government continued to draw heavily on bank financing. Banks, meanwhile, remain willing lenders, preferring to invest surplus liquidity in government securities that offer high, risk free returns. This preference has helped strengthen the stability of the financial sector. Reflecting this trend, bids submitted in treasury bill auctions last week amounted to Rs2.5 trillion, underscoring banks’ strong appetite for government paper. In its Annual Report for 2024–25, the State Bank noted that investments in government securities continued to be the primary driver of the banking sector’s balance sheet growth.