Government borrowing from banks falls in July

KARACHI: The government’s borrowing from banks sharply decreased in the first month of the current fiscal year (FY2025), indicating some relief on the domestic debt servicing burden.

Between July 1 and July 26, the government borrowed Rs145.34 billion from banks, which is a steep decline of 78.37 per cent from the Rs671 billion borrowed during the same period last year, according to the latest data from the State Bank of Pakistan.

“The significant decrease in government borrowing is mainly due to the reduced repayment of SBP debt. The government’s increased borrowing of Rs1.9 trillion in June also contributed to the overall reduction in borrowing,” said Awais Ashraf, director research at AKD Securities Limited.

“The FBR’s tax collection meeting its target, combined with prudent government spending, has also contributed to limiting the rise in debt,” Ashraf added.

Pakistan managed to contain its budget deficit to 6.8 per cent of the GDP or Rs7.2 trillion in the fiscal year 2024, down from 7.7 per cent or Rs6.5 trillion last year. The primary balance also improved, reaching a surplus of 0.9 per cent of the GDP in FY24 compared with a deficit of 1.0 per cent of the GDP in FY23.

Windfalls from petroleum levy and central bank profits, along with reduced development expenditure, collectively contributed to managing the budget deficit. The FBR collected Rs9.29 trillion in FY24, slightly surpassing the downward-revised target of Rs9.25 trillion.

Managing debt with the higher cost of interest payments and precarious finances remains a major challenge for the coalition government of Prime Minister Muhammad Shehbaz Sharif. The government borrowed a record Rs8.5 trillion from banks in the last fiscal year. That compared with Rs3.72 trillion in FY23.

It is important to note that one month’s borrowing figure does not provide a comprehensive idea about future trends. However, if borrowing remains in check and interest rates continue to decrease, it is expected to ease the domestic debt burden. Debt servicing accounts for a considerable amount of government expenditures.

Last month, the SBP reduced its key interest rate by 100 basis points to 19.5 per cent, marking the second consecutive rate cut. As a result of these two cuts, the overall rate has been reduced by 250bps since the last meeting in June.

Given its extremely high gross financing needs and ongoing difficulties in securing external funding, Pakistan’s debt sustainability is at higher risk. According to the government, it has received assurances from China, Saudi Arabia, and the United Arab Emirates to roll over debt for a year. Islamabad awaits final approval for its new $7 billion loan programme with the International Monetary Fund.

Even though the economy stabilized and the cycle of monetary easing began, no new borrowing from the private sector occurred in July, based on data from the SBP. Businesses paid off Rs327 billion to banks in July, compared with Rs171.12 billion in the same month last year.

Due to the tight monetary policy that was in place for almost four years, banks have been under intense criticism for their massive lending to the government at higher interest rates, while loans from consumers and businesses have remained modest.

A statement posted by the Pakistan Banks’ Association (PBA) on a social media platform said that its Chairman Zafar Masud addressed the misconception regarding the size of government funding by banks compared with the industry’s share. He said that when the monetary size of money market operations is excluded, the ratio of private sector funding by banks is 50 per cent, which is a very healthy ratio.

The chairman said that 92 to 93 per cent of the government’s fiscal deficit needs are met through financing from banks, as the government cannot borrow directly from the SBP.Without this financing from banks, the private sector would struggle to sustain itself due to potential government defaults. He highlighted the delicate equilibrium that exists in this financial relationship.