Blurb: Businesses hesitate amid uncertainty, high costs and weak demand conditions.
Islamabad
Private investment in Pakistan has witnessed a sharp decline despite a significant reduction in interest rates, reflecting deeper structural challenges within the economy.
According to an article published in The News International, businesses are holding back from borrowing and expansion due to an uncertain economic environment marked by high energy costs, regulatory unpredictability and heavy taxation.
Data released by the State Bank of Pakistan revealed that private sector bank borrowing fell by 39 per cent during the first seven months of FY2026. Borrowing dropped to Rs 666 billion compared to Rs 1,087 billion during the same period last year. This decline comes despite a steep reduction in the policy rate from 22 per cent to 10.5 per cent within a year, raising concerns about the effectiveness of monetary easing in stimulating investment.
The article noted that if interest rates were the decisive factor driving investment, borrowing levels should have increased rather than declined. Instead, the contraction highlights underlying weaknesses in the business climate. Companies are reportedly reluctant to take on new debt because the environment in which capital must be deployed remains costly and unpredictable.
Industry in Pakistan continues to grapple with prohibitively high electricity tariffs, inconsistent gas supplies, rising logistics expenses and delays in raw material imports. In addition, frequent regulatory changes and an overburdened tax structure further complicate business operations. Analysts argue that even single-digit interest rates cannot compensate for uncompetitive energy pricing and policy instability that erode profitability.
Monetary easing has also had limited impact due to subdued demand. With purchasing power under pressure and exports constrained by competitiveness challenges, businesses see little incentive to expand capacity. Producing more goods makes little sense when domestic and international markets are unable to absorb additional output profitably.
Furthermore, investment decisions are shaped by expectations about future economic conditions. Concerns over sudden taxation measures, exchange-rate volatility and possible policy reversals have prompted many firms to deleverage, conserve cash or postpone expansion plans. The decline in private borrowing thus signals broader economic uncertainty rather than merely a response to interest rate levels.
