Public debt reaches Rs64 trillion, fuelled by currency collapse and high spending

KARACHI: The federal government's debt increased 29 percent year-on-year to Rs64 trillion at the end of August, reflecting the impacts of higher spending, increasing interest costs in the wake of a tight monetary policy, currency depreciation, and a dearth of external financing.

The debt rose by 3.6 percent month-on-month (MoM) in August, according to data released by the State Bank of Pakistan on Thursday. In July, the debt totaled Rs61.7 trillion. By August 31, 2022, the central government's debt had grown to Rs49.6 trillion.

In the first two months (July-August) of the current fiscal year, the amount of debt held by the government rose by 5.13 percent. By the end of June, these public borrowings reached Rs60.8 trillion.

The domestic debt increased to Rs40 trillion at the end of August, a 24 percent increase from the previous year. Domestic debt increased by 2 percent MoM. As of August, the foreign debt has surged by 39 percent to Rs24.1 trillion. The external debt increased by 6 percent MoM.

"The debt has increased because of an increase in external debt and an increase in domestic debt. This increase is because of higher interest rates, rising expenditure, and lack of availability of foreign funding," said Ayesha Fayyaz, the senior analyst at Ktrade Securities.

The government was compelled to raise its domestic debt due to a growing budget deficit amid low revenue and high expenditure demands. The government had to borrow a lot of money from the banks as a result to cover its funding needs.

Owing to the rupee's depreciation versus the dollar, there was also an increase in external debt denominated in rupees. According to data from the SBP, the nation's debt increased due to rising foreign debt, which is a result of currency devaluation.

The rupee fell to 305 per dollar as of August 31, 2023, from 218 a year earlier, a 40 percent decline. The government's markup costs associated with domestic borrowing are rising as a result of higher interest rates, which have reached a record high of 22 percent.

The latest debt data were released as the country's interim government worked to raise the $26 billion in external financing needed to pay off its foreign debt commitments and fund the current account deficit.

The government is attempting to obtain $6.3 billion in concessionary financing from multilateral creditors, according to interim finance minister Dr Shamshad Akhtar. A nine-month, $3 billion bailout package was already approved by the International Monetary Fund (IMF) in July.