In a concerning financial development, interest payments in Pakistan for the month of July have surged alarmingly to a staggering Rs537 billion, surpassing the federal government’s net income for the same month by Rs156 billion. This alarming discrepancy has raised serious concerns about the country’s ability to manage its annual debt servicing costs, especially with the backdrop of soaring interest rates.
Provisional federal fiscal operations for July, marking the beginning of the fiscal year 2023-24, have painted a bleak picture of Pakistan’s financial situation, indicating that the nation’s debt is spiraling into an unsustainable territory. Pakistan is increasingly finding itself borrowing primarily to meet its mounting interest payments, contributing to an ever-expanding debt burden.
Government officials have reported that in July alone, the federal government disbursed an astonishing Rs537 billion in interest payments, while its net income amounted to a mere Rs381 billion, falling short of meeting its interest payment obligations by a significant 41%. Just a year ago, the government’s net income was sufficient to cover interest payments, highlighting the drastic change in the fiscal landscape.
Another alarming revelation is that the Rs537 billion interest payments in July equaled the total tax collection by the Federal Board of Revenue (FBR) for the same month, underscoring the gravity of the situation.
These financial woes have coincided with a sharp uptick in interest rates, forcing the federal government to secure loans at historically high rates, with reports indicating an interest rate of up to 24.5% for a three-month period.
In a move to secure much-needed funds, the federal government resorted to borrowing a massive Rs1.3 trillion at a rate of 24.5% for three months, which was 2.5% higher than the key policy rate. Debt managers have argued that the majority of this sum was borrowed at a 23.25% interest rate, resulting in an average borrowing cost of 23.39%.
Market sentiment has appeared wary of lending to the government amidst reports that the central bank was contemplating an increase in the key policy rate to 25%, though the State Bank of Pakistan (SBP) has denied these reports. The SBP-dominated Monetary Policy Committee is set to convene on September 14, with analysts anticipating further monetary tightening to combat rising inflationary pressures.
With cash reserves perilously low, the federal government had no choice but to secure these costly loans, as its cash buffers fell nearly Rs1.5 trillion short of emergent needs, while facing impending debt repayments of around Rs2.05 trillion.
The current fiscal year has allocated Rs7.3 trillion for debt servicing, but some officials in the Ministry of Finance suggest that the actual cost may exceed Rs8 trillion, adding to the growing financial burden.
The previous fiscal year witnessed Pakistan missing its budget targets and deviating significantly from its agreement with the International Monetary Fund (IMF) in February. This led to a substantial increase in public debt from Rs44 trillion in March 2022 to a staggering Rs61.8 trillion by July this year.
In July, the federal government’s total expenditures surged by a staggering 20% compared to the same month the previous year, reaching Rs645 billion. Notably, the government resorted to borrowing even for essential expenditures, including defense, and recently took on the responsibility for a $1.8 billion polio eradication program.
Development spending also witnessed a significant upturn, rising from Rs5 billion to Rs16 billion compared to the previous year.
Under the IMF program, Pakistan is committed to achieving a primary budget surplus. However, provincial governments contributed a surplus of only Rs39 billion, down from Rs97 billion the previous year. Tax collection by the FBR remained relatively stable at Rs538 billion, compared to Rs437 billion in July of the previous year.
Non-tax revenues saw a substantial increase, totaling Rs139 billion compared to Rs41 billion in the previous year, primarily driven by petroleum levy collection. Gross federal revenue receipts amounted to Rs678 billion, marking an impressive increase of Rs200 billion from the previous year. However, the federal government’s total net income, after transferring provincial shares, stood at just Rs381 billion, highlighting its inability to finance its burgeoning interest payments.
