KARACHI: The government borrowed Rs3.9 trillion banks in six and a half months of the 2023/24 fiscal year, three times more than the same period a year ago, as it struggled to finance a widening budget deficit and rising debt payments, central bank data showed on Wednesday.
The borrowing, which exceeded the Rs3.7 trillion borrowed in the whole of the previous fiscal year, reflected the government’s increasing need for funds to pay back loans and meet its expenses amid a sluggish economy and a record-high inflation.
The State Bank of Pakistan data showed that the government borrowed Rs3.903 trillion from banks between July 1, 2023, and January 12, 2024. This amount is three times the Rs1.276 trillion borrowed during the same period of the last fiscal year. Comparing these borrowings to the corresponding period in the fiscal year 2023, there was a substantial increase of Rs2.627 trillion, or 206 percent.
Awais Ashraf, director of research at Akseer Research, said the government has raised this amount to fund its growing fiscal needs and retire some of the borrowing from SBP.
“Government has retired an amount of PKR 1.04 trillion since Jul'23 to meet continuous criteria of IMF of keeping net government budgetary borrowing from the SBP at PKR 4.7 trillion at December 2023 end,” Ashraf added.
The government borrowed Rs2.767 trillion from banks during July 1, 2023 to January 12, 2024 for budgetary support, compared with Rs1.198 trillion a year earlier.
The rise in markup payments, especially on domestic debt, reflects the government’s growing reliance on domestic resources to finance its budget deficit in a rising interest rate environment.
The SBP has increased its benchmark interest rate by a total of 15 percentage points to a record 22 percent since September 2021 in response to a record-high inflation brought on by shocks in oil and food prices. The policy rate has stayed at 22 percent since June 2023.
Higher cost of servicing debt consumes a significant part of government revenues. The Federal Board of Revenue collected Rs3.5 trillion in taxes in the five months (July-November) of FY2024, up 30 percent from last year.
High public sector borrowing limits the banking funds available to the private sector. With the option of investing in risk-free government securities, Pakistani banks are unable to make use of their enormous liquidity. Businesses and consumers are reluctant to obtain bank loans owing to high borrowing costs.
Nonetheless, the government will receive some payment relief due to the likelihood of a rate cut in March.
The monetary policy meeting of the SBP is scheduled for January 29, 2024. Following the monetary policy decision announced in October 2023, there has been a growing amount of market anticipation about the possibility of an unexpected rate reduction. The general consensus, nevertheless, seems to favour the possibility that interest rates would stay the same despite these predictions.
Pakistan's economy is still seen by the IMF as having substantial downside risks and a weak outlook. Achieving debt sustainability and external stability requires a strong commitment to policy and sufficient external support.
The IMF stated that even while sentiment has improved, sustainability risks are still high because of significant financing needs and a lack of external funding in its most recent country report, which was released last week following the completion of the first review of the stand-by arrangement.
With programme policies, sufficient funding, and persistent efforts, debt sustainability is attainable. It stated that low reserves and restricted market financing create difficulties with foreign exchange payments, and that policy lapses, inadequate funding, or external shocks could endanger sustainability.
The IMF claims that high real interest rates increase the burden of debt.
Programme risk could be posed by exceptionally large external financing risks, international financial institutions, and bilateral disbursement delays. If external funding is insufficient, there would be a greater reliance on pricey domestic financing, it stated.
“Staff and the authorities agreed that while deepening financial markets and widening the investor base for domestic securities are desirable, the government's borrowing requirement must continue to fall, and that a ceiling on government guarantees remains a key tool for limiting debt risks outside the general government perimeter,” the IMF said.
“Going forward, to strengthen transparency in debt reporting, SOE [state-owned enterprise] debts related to commodity operations should be included in the guarantee perimeter.”
The government assured the IMF that given the large share of floating-rate domestic debt and elevated global interest rates the country’s debt servicing costs are projected to remain high over the near term. In view of this, there is an increasingly narrow path for fiscal and monetary discipline to ensure debt sustainability, it said. “Given the importance of maintaining an active market for domestic debt, we will continue to rely on the regular primary T-bill, PIB and Sukuk auctions as the main mechanism for raising new domestic financing,” the government said.
