Govt borrowings from banks surge to Rs1.8tr

KARACHI: Despite fiscal tightening, the government’s borrowing for budgetary support surged to Rs1.8 trillion during the first seven and half months of FY23 against a net retirement of Rs245.8 billion during the same period last year.

The massive borrowing reflects the growing cash requirement of the government while the IMF is pressing it to reduce expenses and generate more revenues.

The State Bank of Pakistan (SBP) data for the period beginning July 1, 2022 to Feb 17, suggested that the government could set a record by end of FY23 if it maintains the aggressive borrowing trend from banks.

There was a net retirement of debt in the first seven and half months, but the FY22 ended with Rs3.133tr budgetary borrowing.

Bankers believe the government would borrow heavily in the last quarter of the current fiscal year to meet the expenses. So far the revenue collection is short of target despite additional taxes, petroleum price rises and 1pc hike in general sales tax to 18pc.

The budget for FY23 estimated net federal government revenue of Rs7.47 trillion but it is difficult to achieve.

Domestic debt servicing for the entire fiscal year was estimated at Rs3.95tr, but with the recent 300bps hike in the interest rate, it would surge to Rs5.4tr, according to analysts.

The IMF says the primary deficit is 0.9pc of GDP or around Rs840bn but the government puts it at 0.45pc or around Rs450bn.

According to budget estimates for 2022-23, the primary deficit was projected to be 0.2pc and the fiscal deficit at 4.9pc.

Primary deficit refers to the difference between the current year’s fiscal deficit and interest payments on previous borrowings. It compels the government to borrow more.

“Pakistan’s interest to revenue ratio which was the worst in the region (just behind Sri Lanka) at 42pc will balloon up to 54pc. This means interest payments will rise from Rs4tr to Rs5.4tr, crowding out other growth and developmental areas,” said Faisal Mamsa CEO of Tresmark.

Higher borrowing with increased interest rates like 20pc would drastically cut the development expenditure which ultimately slashed the overall economic growth.

At this elevated interest rate, domestic investment has become highly risky while the industrialists and traders said it was impossible to invest under the circumstances.

The private sector credit offtake during the first seven and half months fell to Rs467bn against Rs849bn in the same period of last year reflecting the lending pattern of banks.

Banks have been investing heavily in government papers that now offer 21pc profit on treasury bills.

“Half-hearted efforts cannot sustain and Pakistan will soon find itself spiralling deeper into the economic abyss unless the long-awaited reforms are done,” said Mr Mamsa, adding that this is not IMF’s job, they are in the best position to bring about change.

Published in Dawn, March 5th, 2023