Govt borrowing falls by 16pc to Rs1.26tr in more than two months

KARACHI: The government’s borrowing from banks decreased in the first 68 days of the current fiscal year due to reduced spending needs amid lower inflation, and improved tax revenue collection.

According to figures from the State Bank of Pakistan, the federal government’s borrowing from banks amounted to Rs1.264 trillion from July 1 to September 6, 2024, 16.46 per cent lower than the same period last year.

The government’s borrowing has been declining since the beginning of fiscal year 2025, and analysts attribute this decline to several reasons.

“One significant reason could be the government’s focus on fiscal discipline and better budget management, aiming to reduce the fiscal deficit by controlling expenditures and enhancing revenue collection through improved tax administration,” said Saad Hanif, the head of research at Ismail Iqbal Securities.

“The SBP monetary tightening, which makes borrowing more expensive, could also be a contributing factor, as higher interest rates discourage borrowing,” Hanif said and added that inflation control efforts may also play a role, as excessive borrowing can increase the money supply and fuel inflationary pressures.

“There could be a deliberate effort by the government to repay existing debt and lower its overall debt burden, further reducing the need for new borrowing from the banking system,” he said.

According to SBP data, between July 1 and September 6, FY25, the government repaid Rs744.3 billion to the SBP, as opposed to Rs27.612 billion during the same period in FY24.Pakistan accomplished the feat of containing its budget deficit, which was 7.7 per cent of the GDP or Rs6.5 trillion in the previous year, to 6.8 per cent of the GDP or Rs7.2 trillion in the fiscal year 2024. The primary balance improved, going from a deficit of 1.0 percent of the GDP in FY23 to a surplus of 0.9 per cent of the GDP in FY24.

In July and August of FY25, FBR tax revenue increased by 20.5 per cent. To fulfil the fiscal year’s revenue target, the SBP said in its monetary policy statement last week that the pace of tax collection in the remaining months of FY25 must be much greater than it is now.The SBP stated that the progress made in fiscal consolidation over the past couple of years has helped the monetary policy in reducing inflation and restoring overall macroeconomic stability.

Headline inflation slipped to 9.6 per cent in August from 12.6 per cent in July, continuing its downward trend, while core inflation fell to 11.9 per cent from 14.1 per cent.The gross public debt to GDP ratio has recorded a significant improvement, declining from 75 per cent at end-June 2023 to 67.2 per cent at end-June 2024.

The development of Pakistan’s domestic debt markets, wherein the government raises funds via treasury notes and bonds, is expected to lessen the country’s reliance on directbank borrowing, according to analysts. Last year, the government began issuing domestic Islamic bonds, or sukuk, on the Pakistan Stock Exchange in order to raise debt.

Interest payments on the national debt continue to be a major financial burden on the finances of the nation, accounting for around 70 per cent of the total government revenue. The government is under constant pressure to reduce development spending under the Public Sector Development Programme (PSDP), which is a major generator of economic activity. Other significant expenses include government wages, pensions, and social spending for the impoverished.

Nonetheless, it is anticipated that the government will receive some relief from the interest rate drop in terms of lower debt servicing costs on the domestic debt. Last week, the SBP cut its benchmark interest rate by 200 basis points to 17.5 per cent. Since June, the SBP has lowered rates by a total of 450 basis points. Analysts expect that this fiscal year’s expected foreign funding will contribute to lowering the government's borrowing requirements. At its meeting on September 25, the executive board of the International Monetary Fund is expected to approve Pakistan’s $7 billion loan program.

Topline Securities reported that open market operations (OMO) reached an all-time high of Rs12 trillion as of June 2024.“Through OMOs, central banks buy government securities (bonds/treasury bills) in the open market to inject liquidity into the banking sector,” it said.

This helps ensure that banks have sufficient funds to meet the government's borrowing needs, as the government cannot borrow directly from central banks due to IMF restrictions, it added.“We believe that fiscal discipline, along with foreign inflows, will lead to lower government borrowing and a reduction in OMOs.”