Development Loans markup slashed as Pakistan eases borrowing costs for provinces
Finance Ministry reduces the annual markup on government development loans by nearly six percentage points, following a sharp decline in the State Bank’s policy rate.
The Finance Ministry announces a lower markup rate for development loans in FY2025-26.
ISLAMABAD: The federal government has reduced the markup rate on development loans and advances to provincial governments, public sector entities and other government institutions to 11.89% for the fiscal year 2025-26, reflecting lower borrowing costs after the State Bank of Pakistan’s policy rate declined.
According to a notification issued by the Ministry of Finance, the new rate is down from 17.74% in 2024-25 and 17.84% in 2023-24.
Markup falls after policy rate cuts
The reduction follows a significant decline in the State Bank’s benchmark policy rate, which has fallen from a peak of 22% to 11.5%.
The revised markup applies to Cash Development Loans (CDLs) provided by the federal government to provincial governments, Azad Jammu and Kashmir (AJK), Gilgit-Baltistan, local governments, state-owned enterprises (SOEs), autonomous bodies and public financial institutions.
The same 11.89% annual rate will also apply to government loans for house building and vehicle purchases, according to the Finance Ministry.
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Provinces and public entities to benefit
The revised rate will reduce financing costs for provinces and other public institutions undertaking development projects and social programmes.
The federal government extends these loans to support infrastructure, public services and development initiatives across the country.
Officials said the annual markup is reviewed based on the government’s own debt servicing costs on treasury bills and Pakistan Investment Bonds.
Markup remains above pre-2021 levels
Despite the reduction, the current rate remains substantially higher than previous years.
The markup stood at 10.30% in 2020-21 and 6.54% in 2016-17, meaning the new rate is still significantly above historical levels.
The increase over the past decade has made interest income from government lending an important source of federal revenue.
Interest income remains a major revenue source
During 2024-25, the federal government collected approximately Rs245 billion in markup from provinces, state-owned enterprises and other public institutions.
In 2025-26, the government had expected to generate around Rs164 billion from development loans and cash advances before the latest rate revision.
Most foreign-funded development loans are secured by the federal government at relatively low interest rates before being re-lent to provinces and public entities under agreed financing arrangements.
