Government borrowing soars 71 percent to Rs5.301 trillion in July-April

KARACHI: The government borrowed a staggering Rs5.301 trillion from banks between July 1, 2023, and April 12, 2024, central bank data showed on Tuesday, highlighting the country's significant cash needs to cover its budget deficit and increased debt interest payments.

The borrowing amount marks a 71 percent increase compared to the same period in the last fiscal year, when the government borrowed Rs3.102 trillion. The total amount borrowed between July and April FY24 is also higher than the Rs3.716 trillion borrowed for the entire FY23.This increase is a reflection of the difficulty the government of Prime Minister Muhammad Shehbaz Sharif is having in fixing the public finances. The government's increasing demand for funding is putting a strain on the economy, and there isn't much money left over after interest payments to allocate to domestic debt service.

The cost of borrowing for the government has skyrocketed, amounting to Rs4.2 trillion in the first half of FY24—or 61 percent of total revenue. The government uses a sizable portion of its revenue stream to pay interest on its national debt. A historically high interest rate is the primary cause.

There are divergent opinions among analysts on whether the State Bank of Pakistan would maintain the current policy rate of 22 percent or cut it at its upcoming monetary policy review meeting on April 29 in response to a reduction in inflationary pressures.

Analysts predict that inflation would drop from 20.7 percent in March to 17.1 percent in April, providing the SBP with plenty of leeway to begin monetary easing. Discussions with the IMF, however, place more emphasis on austerity and economic adjustments, which will probably first drive inflation. A spike in oil prices is another factor that could jeopardise the stability of the currency and make the beginning of a monetary easing cycle prudent.

The government borrows an astounding amount from domestic banks, but the demand for loans from private businesses has remained weak. Bank lending to the private sector was Rs45.542 billion from July 1, 2023, to April 12, 2024, as opposed to Rs218 billion over the same period of the year before.

Unexpectedly, Pakistan reported a $619 million current account surplus in March—the highest since February 2015. According to Finance Minister Muhammad Aurangzeb, the government could reach a staff-level agreement with the International Monetary Fund by early July on a new, longer-term loan.

The nation's existing $3 billion agreement with the fund expires in late April. It was obtained last summer in an effort to prevent a sovereign default.To promote growth and support businesses, the SBP ought to consider cutting interest rates in light of the improvement in the nation's external account.

According to Aurangzeb, structural reforms would include better management of the heavily indebted energy sector, lowering losses of state-owned enterprises through privatisation, and raising the government's tax revenue-to-GDP ratio from the current level of roughly 9 percent to 13 or 14 percent in the next two or three years.