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Government borrows Rs500bn from banks in 21 days

In the first 21 days of the current financial year, the government borrowed half a trillion rupees from banks, reflecting the rising burden of domestic debt servicing which requires Rs7.3 trillion in FY24.

The latest data issued by the State Bank of Pakistan (SBP) on Wednesday shows that the government’s borrowing reached Rs499.9 billion by July 21. This is in contrast to a net retirement of Rs120.4bn in the same period of the previous fiscal year, FY23. The previous fiscal year witnessed a very high increase in debt, adding Rs3.8tr to the total stock of Rs18.4tr. The government is unable to generate enough revenue to meet its growing debt servicing needs. The budget for FY24 allocates around Rs7.3 trillion for debt servicing, including interest payments and principal retirement, which constitutes 50.5 per cent of the total budget outlay of Rs14.460tr. The government allocated Rs6.43tr for domestic debt and Rs872.25bn for foreign debt.

The auction of domestic bonds indicated the trend of high borrowing by the government, as well as banks’ willingness to invest heavily in risk-free government bonds. Banks have been making profits from their investments in government bonds, while their lending to the private sector reached its lowest point in FY23.

Private sector credit was limited to Rs211bn in FY23, compared to Rs1.612tr in FY22, reflecting the poor growth trend. The economic growth was just 0.3pc in FY23. The trend persists in the new fiscal year, as the private sector credit shows a net retirement of Rs177bn, compared to the borrowing of Rs89bn in the same period of the last fiscal year, FY23.

Domestic debt servicing requires Rs7.3tr in FY24, posing a rising burden

Economic growth is a critical factor for the economy and is estimated to be in the range of two to three per cent of GDP in FY24, as projected by the SBP in its monetary policy issued on July 31.

Economists and analysts reported a slow growth trend for the economy, which would impact the targeted revenue generation for this fiscal year. The government is expected to earn the highest revenue through sales tax due to the anticipated high inflation of up to 28pc this year.

Analysts said the government would need to borrow more to pay for debt servicing, and this cycle is likely to continue for an unlimited period. Banks’ shares were blue-chip in the stock market as they earned good profits. However, apart from banks, most sectors posted either losses or profits below expectations. The weak economic growth does not necessitate money from banks, but the record-high 22pc interest rate poses a significant obstacle to lending to the private sector.

The $3bn Standby Arrangement with the IMF carries a condition of further hikes in the interest rate to counter inflation. Trade and industries have already shown their inability to make fresh investments at a 22pc interest rate. With this interest rate, the cost of doing business is the highest in the region.