Government Borrowing from Banks Nears Rs 7 Trillion Mark

Government Borrowing from Banks Nears Rs 7 Trillion Mark – Government borrowing from banks in Pakistan has surged to unprecedented levels, nearing a staggering Rs 7 trillion. Data from the State Bank of Pakistan (SBP) revealed that between July 1, 2023, and May 17, 2024, the federal government borrowed Rs 6.795 trillion.

This represents a significant increase of Rs 3.649 trillion, or 116 percent, compared to the same period last year.

The government’s increasing reliance on borrowing at higher interest rates from commercial banks is primarily due to its expenditure far exceeding revenue generated from taxes and other sources. This dependence on costly domestic borrowing has significantly escalated interest payments, posing a substantial financial challenge for the government.

During the first nine months of the fiscal year 2024, the budget deficit reached Rs 3.902 trillion, equivalent to 3.7 percent of GDP, up from Rs 3.08 trillion, or 3.6 percent of GDP, in the same period of fiscal year 2023. This widening deficit is largely attributed to higher debt servicing costs on both domestic and external debt, driven by elevated interest rates and the devaluation of the rupee.

Additionally, the federal government’s efforts to clear Rs 1.4 trillion of borrowing from the State Bank of Pakistan further contributed to the escalating debt levels during this period. This strategy, while aimed at improving liquidity, has added to the overall debt burden.

On June 7, the government is set to unveil the budget for the fiscal year 2025. Observers anticipate that this budget will align closely with recommendations from the International Monetary Fund (IMF). However, significant public relief measures are not expected. Instead, the focus will likely be on expanding the tax base to meet revenue targets.

Pakistan is currently negotiating a new loan program with the IMF. In line with these negotiations, the Federal Board of Revenue (FBR) aims to broaden the tax base in the FY25 budget by targeting untaxed sectors and industries through various strategies. The FBR’s revenue collection target is expected to be set at Rs 12.4 trillion.

The government is projected to forecast a budget deficit of Rs 9.3 trillion for the next fiscal year. To address this, measures to curtail overall expenditure are anticipated in the upcoming budget. This is particularly crucial given that more than 80 percent of tax revenue is currently used to service debt interest.

The current expenditure in the FY25 budget is expected to rise to Rs 16.7 trillion, up from FY24’s budgeted current expenditure of Rs 13.3 trillion, mainly due to higher interest payments. This increase in expenditure underscores the financial strain imposed by the country’s debt obligations.

Analysts suggest that the expected reduction in price pressures could justify a rate cut by the SBP in June. They project an inflation rate of 12 percent for FY25, which is significantly lower compared to the near-crisis levels of FY23, where the policy rate peaked at an all-time high of 22 percent. This more stable macroeconomic environment provides the SBP with a strong case to begin reducing interest rates by 100–200 basis points in the coming months.

Overall, the government’s burgeoning borrowing from banks reflects the ongoing fiscal challenges faced by Pakistan. The forthcoming budget and negotiations with the IMF will be critical in shaping the country’s financial strategy and addressing the high levels of debt and associated costs.