Government Borrowing Hits Rs. 4.9 Trillion: Boost for Banks, Pressure on Cement and Steel

What the government's borrowing surge means

The government borrowed over Rs. 4.9 trillion from commercial banks during the first eleven and a half months of fiscal year 2026 (FY26). This figure, covering July 1, 2025, to June 12, 2026, is significantly higher than the Rs. 3.7 trillion borrowed in the same period a year earlier, despite a notable increase in tax revenues. Analysts expect total borrowing for FY26 to exceed Rs. 5.434 trillion recorded in FY25.

This sustained reliance on bank borrowing has pushed up the government's debt servicing costs. For the upcoming FY27 budget, nearly Rs. 8 trillion has been earmarked for debt repayments. This leaves only about Rs. 1 trillion for the Public Sector Development Programme (PSDP), which funds critical infrastructure and development projects across the country. Economists point to rising expenditures and a lack of clear strategy to contain spending as the main drivers behind this heavy borrowing, even as tax collections improve.

Why it matters for bank and construction stocks

This borrowing trend creates a dual impact on the Pakistan Stock Exchange. For Commercial Banks, the government's increased demand for funds typically translates into higher yields on government securities like T-bills and PIBs. Banks, which are major subscribers to these instruments, benefit from the higher interest income they earn on their investment portfolios. This directly boosts their net interest income, which is the difference between what they earn on loans and investments and what they pay on deposits.

Conversely, the significant allocation to debt servicing in the FY27 budget comes at the expense of the Public Sector Development Programme. A reduced PSDP means fewer government-funded construction and infrastructure projects, which are a key source of demand for the construction sector. This directly impacts companies involved in producing basic construction materials like cement and steel.

Which stocks, and why

Commercial banks are likely to see a positive impact. Heavy government borrowing means banks can deploy their significant deposit base into high-yielding government paper. This is beneficial for their profitability. Major players like Habib Bank, United Bank, MCB Bank, Meezan Bank, Bank Alfalah, Bank Al Habib, National Bank of Pakistan, Askari Bank, and Faysal Bank are all exposed to this dynamic, as higher government bond yields directly enhance their investment income.

On the other hand, companies in the cement and steel sectors face a negative outlook due to the constrained PSDP. Less government spending on infrastructure means lower demand for construction materials. Cement manufacturers such as Lucky Cement, Maple Leaf Cement, Fauji Cement, Kohat Cement, Cherat Cement, Pioneer Cement, and D.G. Khan Cement will likely experience reduced order flows from public projects. Similarly, steel producers like Mughal Iron & Steel, International Steels, and Amreli Steels, which supply rebar and other steel products for construction, will also feel the pinch from a slowdown in government-led development.

What to watch

Investors should closely monitor the cut-off yields in upcoming State Bank of Pakistan (SBP) auctions for government securities. Consistently high yields would confirm the positive impact on bank earnings. For the construction sector, tracking actual PSDP releases and the pace of public project execution in FY27 will be crucial. Any revisions to the PSDP allocation or a faster-than-expected rollout of projects could alter the outlook for cement and steel companies. Additionally, the government's broader fiscal strategy and any potential engagement with the IMF program could influence future borrowing trends and interest rate dynamics.