For the first time at least this century, Pakistan’s credit system is operating in an environment of persistently positive real interest rates. Whether the corporate sector likes it or not, the central bank has consistently signaled that this regime is here to stay. That alone marks a historic break from the old pattern.
The typical growth cycle in Pakistan has always relied on cheap money. The script was familiar: zero or negative real rates, corporates lever up, and export-oriented firms gorge on concessional credit.
The leverage did not always translate into fixed investment or new capacity, but it always translated into liquidity. That liquidity spilled into the rest of the economy through generous trade terms. Generous receivables terms, suppliers paid on time, and on occasion on partial advances.
The corporate sector became the transmission mechanism of monetary stimulus, pushing liquidity into the rest of the eighty percent of the economy that sits outside the formal large-scale sector. The wheel turned, and GDP growth picked up.
Consistently positive real rates have broken that script. The corporate sector has no playbook for borrowing and expanding in a world where the cost of credit consistently exceeds inflation. Its lobbying instinct is predictable: pressure SBP to slash rates, recycle the old growth story, and hope the economy can stumble back into motion. But SBP, at least for now, is refusing to blink.
The credit data tells the story. In the past twelve months, SME credit grew by 46 percent and agriculture credit by 40 percent. Corporate credit grew by just 11 percent, while overall private sector credit rose a mere 9 percent. On paper, the percentage growth in SME and agri lending looks spectacular. But the base is small. The combined expansion amounts to around Rs 200 billion. By contrast, a 20 percent increase in corporate credit would have added over Rs 1.8 trillion in liquidity to the system. The difference in scale explains why the economy still feels tight despite the headline growth in SME and agri lending.
This also explains why corporate lobbies are the loudest critics of SBP’s stance. Their model is broken. For decades, corporates grew by arbitraging negative real rates, rolling over subsidized debt, and transmitting liquidity down the value chain. Without that lifeline, they are stranded. Meanwhile, the so-called “uncompetitive” SMEs and farmers are still willing to borrow at rates north of 15 percent.
The implication is profound. Even if SME or agri loans go bad, the episodes will be isolated. Their credit footprint is too small to take the financial system down. The bigger risk to economic recovery lies with corporates that are determined to sit idle until the central bank restores the negative real rate regime they once thrived on. That is not coming back.
Applaud SBP for holding the line. For once, the central bank is not bending to pressure for premature easing. It is forcing the system to adjust to a new equilibrium where growth cannot be manufactured by cheap leverage at the top. This is a painful transition, but it is also a necessary one.
An economy addicted to negative real rates is an economy addicted to inflationary cycles, fiscal slippage, and periodic external crises. Breaking that addiction requires exactly what SBP is doing: maintaining positive real rates long enough for the system to recalibrate.
The real question now is how Pakistan grows in this brave new world. The answer cannot be the old formula of subsidized corporate leverage trickling down into trade credit. Instead, growth will have to be built on stronger SME and agricultural dynamism, on trade credit discipline that does not depend on cheap rollover loans, and on equity financing that forces real investment rather than financial engineering. It will be slower, more uneven, and messier. But it will also be more sustainable.
SBP is not perfect. It has misjudged inflation before, and it still leans on assumptions about official inflows and fiscal consolidation that may not hold. But on this point it deserves full marks. By refusing to cave to corporate pressure, it is signaling that Pakistan cannot rely forever on negative real rates to grease the wheels of growth. The brave new world of positive real rates is uncomfortable. But it is also the only way forward.