KARACHI: Government borrowing from banks reached a record Rs6.8 trillion in the July-May fiscal year 2024, posing a challenge for Prime Minister Shehbaz Sharif’s administration, which plans to slash its spending to narrow the budget deficit as it prepares to unveil budget FY2024-25 next week.
The federal government borrowed Rs6.795 trillion between July 1, 2023, and May 17, 2024, Rs3.649 trillion, or 116 percent more than in the same period last year, the central bank data showed on Wednesday.
The government borrows money at higher interest rates from commercial banks because its expenses exceed its revenue from taxes and other sources. Due to the government’s high debt levels and reliance on costly domestic borrowing, interest payments have soared, posing a significant problem for the government.
The budget deficit for the first nine months of FY24 was Rs3.902 trillion, or 3.7 percent of GDP, compared with Rs3.08 trillion, or 3.6 percent of GDP in FY23.
“The significant increase in borrowing was primarily driven by a higher fiscal deficit, which resulted from elevated debt servicing costs on both domestic and external debt due to higher interest rates and rupee devaluation,” said Awais Ashraf, director of research at Akseer Research.“Additionally, the federal government further exacerbated debt levels by clearing Rs1.4 trillion of borrowing from the State Bank of Pakistan during this period,” Ashraf added.
On June 7, the budget for the fiscal year 2025 is set to be unveiled. While observers anticipate it to comply with International Monetary Fund (IMF) recommendations, there may not be many substantial public relief initiatives. The forthcoming budget is anticipated to be centered on measures meant to increase the tax base to nearly reach revenue targets.
Pakistan is negotiating a new loan programme with the IMF.The Federal Board of Revenue (FBR) aims to broaden the tax base in the FY25 budget by targeting the untaxed sectors/industries and various approaches. The FBR’s target for revenue collection is expected to be Rs12.4 trillion.
The government is likely to project a budget deficit for the next fiscal year at Rs9.3 trillion. The attempts to curtail overall expenditure are also anticipated in the upcoming budget, especially considering that more than 80 percent of tax revenue is used to service markups.
Current expenditure in the FY25 budget is anticipated to swell up to Rs16.7 trillion against FY24’s budgeted current expenditure of Rs13.3 trillion, mainly due to higher markup payments.
According to analysts, the expected reduction in price pressures will provide a compelling case for a rate cut in June. They project that in FY25, inflation will be 12 percent. When compared with the near-meltdown scenario that occurred in FY23 —during which the policy rate was gradually raised to its highest level ever—of 22 percent, the macroeconomic indicators show a far more serene picture today.This gives the State Bank of Pakistan enough justification to begin cutting rates by 100–200 basis points from next month, according to analysts.