Debt servicing to eat more than half of budget

ISLAMABAD: Pakistan faces a significant challenge in its fiscal landscape as debt servicing looms large, poised to consume over half of the country’s revenues in the coming fiscal year, severely straining the economy. The diversion of government revenues to debt servicing affects economic growth and essential services like healthcare and education.

Pakistan’s total federal budget for FY25 is Rs18.877 trillion, with Rs9.775 trillion earmarked for interest and loan repayments. This hefty sum represents 51.78 percent of the overall budget.

These figures indicate an increase of Rs1.524 trillion, or 18.5 percent, compared to the revised estimate of Rs8.251 trillion in the outgoing fiscal year, highlighting the mounting burden of public debt.

The allocation for debt servicing in the upcoming fiscal year includes Rs1.038 billion for foreign debt and Rs8.736 trillion for domestic debt.

The allocated amount for debt servicing in the upcoming fiscal year surpasses the previous year’s allocated expenditure on retiring public debt by Rs2.473 trillion, a 33.87 percent increase. The soaring financial burden exacerbates fiscal deficits and necessitates further borrowing, creating a vicious cycle. High debt levels also crowd out private investment, stifling growth and innovation, while pressuring the Pakistani rupee, leading to currency devaluation and inflation.

Public debt rises when an economy fails to cover its expenditures using its resources, such as tax revenues, and turns to borrowing from local and foreign lenders to bridge the fiscal deficit.

Pakistan’s public debt has surged to Rs67.525 trillion by the end of March 2024. During these nine months, around 88 percent of the fiscal deficit was financed through domestic markets, with the remaining 12 percent coming from external sources.

The government focused on long-term domestic debt securities, primarily floating rate Pakistan Investment Bonds (PIBs) and Sukuk, to manage its fiscal deficit and repay debt maturities. This strategy allowed the government to retire Rs0.8 trillion in Treasury Bills, reducing short-term maturities.

To enhance competitiveness and transparency in borrowing operations and diversify the investor base, the government amended the Treasury Bills Rules of 1998 and the Ijara Sukuk Rules of 2008. These amendments facilitated the maiden auction of one-year fixed rate Ijara Sukuk on the Pakistan Stock Exchange (PSX) in December 2023, with the entire Sukuk auction system now shifted to the PSX. Additionally, the government introduced a one-year discounted Sukuk instrument, issuing approximately Rs1.5 trillion in Shariah-compliant Sukuk instruments to diversify investment options.

External budgetary disbursements totaled $6.3 billion, with $2.7 billion from multilateral sources, $2.8 billion from bilateral development partners, and $0.8 billion from Naya Pakistan Certificates. The government also received $1.2 billion under the IMF’s Stand-By Arrangement (SBA) and a $1 billion bilateral deposit from the UAE for balance of payment support.

During the nine months of the outgoing fiscal year, the interest expense on public debt was recorded at Rs5.517 trillion against an annual budget estimate of Rs7.302 trillion. Interest expenses on domestic debt alone were Rs4.807 trillion, 55 percent higher than the previous year, attributed to high borrowing costs on new domestic debt and resetting existing floating-rate debt at higher rates due to an elevated policy rate.

On external debt, which is Rs24.093 trillion ($86.68 billion), interest payments in these nine months stood at Rs710 billion ($2.639 billion), while $5.33 billion in principal external debt was retired, including $2.8 billion against multilateral debt, $2 billion against bilateral debt, and $0.6 billion against Naya Pakistan Certificates. In these nine months, on external debt, the interest and principal repayments stood at $7.969 billion.

The high burden of debt and its financing leaves limited fiscal space with the government and hampers its ability to implement economic stimulus policies, increasing reliance on external aid with stringent conditions. Investor confidence is waning, reducing foreign direct investment and risking credit rating downgrades, which would further increase borrowing costs.