KARACHI, May 9, 2024 – Pakistan has set a new record in domestic borrowing, securing approximately Rs 6 trillion from commercial banks during the first ten months of fiscal year 2023-24, primarily to finance its burgeoning budget deficit.
This borrowing represents a significant increase of 124.13 percent compared to the same period last year, reflecting the government’s struggle to bridge the fiscal gap amid limited external financing options. From July 1, 2023, to April 26, 2024, the government’s bank borrowing amounted to Rs 5.964 trillion, a substantial jump from Rs 2.661 trillion during the corresponding period of the previous fiscal year.
The surge in borrowing is attributed to higher government expenditures outpacing its revenue collection, necessitating reliance on domestic banks at elevated interest rates. This financial strategy underscores the ongoing challenges faced by Prime Minister Muhammad Shehbaz Sharif’s administration, which grapples with enhancing tax revenues in a sluggish economic environment and mitigating losses from state-owned enterprises.
One of the critical financial burdens for the government remains the cost of servicing its debt. Interest payments have skyrocketed due to the increased levels of borrowing and the government’s leaning towards expensive domestic loans. As a result, the budget deficit for the first nine months of FY24 escalated to Rs 3.902 trillion or 3.7 percent of GDP, up from Rs 3.08 trillion or 3.6 percent of GDP in the same period of FY23.
Moreover, the Federal Board of Revenue (FBR) reported a shortfall in April’s tax collection, missing its Rs 717 billion target by Rs 63 billion and only gathering Rs 654 billion. However, this figure still marked a 34.56 percent increase from April of the previous year, which saw a collection of Rs 486 billion.
Despite these challenges, there is a silver lining with the potential easing of inflationary pressures. The State Bank of Pakistan has held the key interest rate steady at a historical high of 22 percent. Yet, recent data from the weekly sensitive price index indicates a consistent downward trend in inflation, raising hopes among the business community and stirring debates over the delayed interest rate cuts.
Finance Minister Muhammad Aurangzeb voiced optimism regarding the declining inflation trajectory in the forthcoming months and hinted at possible interest rate reductions in the near future. Such a move is eagerly anticipated, as it could provide some relief to the pressured economy and support the government’s efforts to stabilize its fiscal standing.
As Pakistan navigates these economic hurdles, the scale of its domestic borrowing underscores the acute need for comprehensive fiscal reforms and improved revenue collection strategies to sustain its financial health.
