Govt’s bank borrowing rises by 77pc to whoppingRs7.76tr in a year

KARACHI: The government borrowed Rs7.766tr from banks between July 1, 2023 and June 14, 2024, an increase of 77.52 per cent over the same period last year, the central bank data showed on Wednesday.

The government was compelled to rely significantly on bank borrowings to meet its financial demands due to a large budget deficit, maturing debt repayment and rising interest costs.Generally speaking, the government spends more money than it raises in taxes. It borrows money to close this gap, but it must pay it back with interest at a record-high rate.

The State Bank of Pakistan reduced its key interest rate by 150 bps to 20.5 per cent on June 10. This reduction came after keeping the rates at a historically high 22 per cent since June of last year to control inflation.

“Government borrowing increased to fund growing budgetary requirement and retirement of SBP debt to meet IMF requirement,” said Awais Ashraf, director research at AKD Securities Limited.

“We anticipate that government borrowing will rise in FY25 at a similar rate due to the increasing cost of debt servicing, despite significant efforts to boost revenue as indicated in the budget,” Ashraf added.The government intends to borrow Rs7.68 trillion locally through government securities and to fund Rs0.66 trillion through external financing (commercial and Euro bonds) in FY25.

During the July-June period of the current fiscal year, the government borrowed more money than it did during the combined months of the two previous fiscal years. In comparison to the July-June FY24 period of Rs7.766 trillion, the government borrowed Rs3.72 trillion in FY23 and Rs3.49 trillion in FY22 for a total of Rs7.16 trillion. It should be noted that while the full FY24 numbers will be made public next month, the figures for available borrowings are as of June 14.

The National Assembly’s budget discussion session is ongoing, and Finance Minister Muhammad Aurangzeb has presented the budget context and his strategies for reducing spending and raising tax revenue to control the budget deficit.

Some worries regarding the budget’s approval were allayed when the Pakistan Peoples Party, a coalition partner, made hints that it would support the budget in the best interests of the country.Pakistan’s ambitious FY25 enhances the likelihood of an IMF deal for a new loan programme, according to a recent assessment from Fitch Ratings. Although it is unclear if fiscal goals will be met, even if the budget is only partially implemented, it is predicted that the fiscal deficit will decrease. Even though growth may suffer as a result, this should lessen external pressures.

In FY25, the government aims to achieve a primary surplus of 2.0 per cent and a budget deficit of 5.9 per cent of the GDP, as opposed to an estimated 7.4 per cent and 0.4 per cent for FY24. This is due to a combination of considerable financial efforts at the provincial level and broad tax hikes. This is an effort to get access to a new, longer and bigger IMF bailout.

Government debt looks set to decline to 68 per cent of theGDP by FY24 due to high inflation and deflator effects, offsetting soaring domestic interest costs, according to Fitch Ratings. It expects inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower.

For FY25, Rs1.674 trillion has been allocated for development spending, an increase of 47 percent over FY24. On Tuesday, however, the finance minister declared the elimination of Rs15 billion in taxes and a Rs250 billion reduction in the development budget.

For FY25, the government plans to boost current spending by 30 per cent. The increase is mostly the result of a 33.8 per cent rise in markup payments due to higher interest rates.

The government has set aside Rs1.04 trillion for servicing foreign debt and Rs8.736 trillion for servicing domestic debt in the next fiscal year, totalling Rs9.8 trillion. In FY25, the Federal Board of Revenue aims to raise tax collection to Rs12.97 trillion, a 40 per cent increase over FY24.