Karachi, July 17, 2024 – Pakistan’s bank borrowing surged to an unprecedented Rs 8.56 trillion in the fiscal year 2023-24, marking a 130 percent increase over the previous fiscal year, according to official data.
The State Bank of Pakistan (SBP) reported that the federal government borrowed Rs 3.72 trillion from commercial banks in the preceding fiscal year. This significant rise in bank borrowing underscores the government’s struggle to manage fiscal operations. The substantial borrowing from the banking system was primarily to finance the budget through the sale of securities.
The government’s increased reliance on bank borrowing occurred despite the high-interest rate, which remained at 22 percent throughout the fiscal year 2023-24. This scenario highlights the fiscal pressures faced by the government, as it turned to the banking sector for substantial financing needs.
In contrast, the federal government repaid Rs 608 billion to the State Bank of Pakistan during FY2023-24, a notable shift from the borrowing of Rs 196 billion in the previous fiscal year. This repayment indicates an effort to reduce reliance on central bank financing, aligning with broader economic stabilization measures.
Additionally, the private sector’s borrowing saw a significant increase, reaching Rs 368 billion in FY2023-24 compared to Rs 208 billion in the previous fiscal year. This uptick in private sector borrowing suggests a growing demand for credit, which could be indicative of expanding business activities and investment.
In its latest report, Fitch Ratings highlighted that despite likely missing their ambitious budget targets, Pakistani policymakers are expected to reduce the budget deficit from 7.4% of GDP in FY2023/24 to 6.7% in FY2024/25. This anticipated reduction is contingent upon the government’s adherence to its current policy trajectory, which may help secure a longer-term deal with the International Monetary Fund (IMF).
However, Fitch Ratings warned that Pakistan’s economic recovery remains fragile. Any additional economic shocks could swiftly escalate the cost of servicing the country’s substantial government debt. The risks to the economic outlook are predominantly on the downside, given the precarious fiscal situation and the need for substantial reforms.
The record level of bank borrowing reflects broader challenges within Pakistan’s fiscal management. High borrowing costs, driven by elevated interest rates, add to the fiscal burden. The government’s strategy of financing its budget deficit through commercial bank borrowing may not be sustainable in the long term, particularly if economic conditions deteriorate further.
The increase in private sector borrowing, while indicative of economic activity, also suggests that businesses are facing higher financing costs. This could impact profitability and investment decisions, potentially slowing down economic growth if credit becomes less accessible or more expensive.
The repayment of central bank loans and increased borrowing from commercial banks may also reflect an attempt to diversify financing sources. However, this approach carries risks, especially if the government faces difficulties in rolling over existing debt or securing new financing at favorable terms.
Pakistan’s record bank borrowing in FY2023-24 highlights the severe fiscal challenges facing the country. With the government navigating high-interest rates and a fragile economic recovery, the path ahead remains fraught with risks. Effective fiscal management and adherence to economic reforms will be crucial for stabilizing the economy and securing sustainable growth.
As policymakers work towards reducing the budget deficit and managing debt levels, the focus will need to remain on ensuring economic stability and addressing structural weaknesses within the fiscal framework. The coming fiscal year will be critical in determining Pakistan’s economic trajectory and its ability to manage both domestic and external financial pressures.