The federal budget deficit widened by over Rs3.5 trillion in the first nine months of current fiscal year on the back of a massive surge in spending on debt servicing and defence needs that consumed two-thirds of the total expenditure, the Ministry of Finance reported on Friday.
Fiscal operation details showed an abnormal increase of 70% in the debt servicing cost, which skyrocketed due to record-high interest rates.
During the July-March period, interest expenses stood at Rs3.58 trillion, up by Rs1.46 trillion compared to the same period of last fiscal year.
The cost of debt servicing alone was Rs139 billion more than the federal government’s net income during the same period. Earlier, the net income was fully meeting the interest expenses while partly covering the defence budget.
The federal government paid Rs3.1 trillion in domestic debt servicing, which was equal to 87% of the total debt servicing. The high share of domestic debt servicing underscores Pakistan will have to restructure the domestic debt along with the external debt to find a solution to the looming default risk.
However, Finance Minister Ishaq Dar on Friday again ruled out the possibility of debt restructuring, a path that can avert the debt default. The central bank has set the interest rate at 21% to contain inflation, a goal that the State Bank of Pakistan (SBP) could not achieve but in the process dented fiscal position of the country.
It also forced the government to cut other expenses to pay for debt servicing and defence needs.
However, the International Monetary Fund (IMF) said this week that Pakistan needed to further increase the interest rate to ease inflationary pressures.
As against the earlier estimate of Rs4 trillion, the government sees the debt servicing cost jumping to Rs5.2 trillion by the end of current fiscal year.
All other major current expenses, excluding defence, showed a negative growth in the first nine months of FY23. The other expenses amounted to Rs2.06 trillion, down by Rs429 billion, or 17%, compared to last year.
Excluding military pensions and expenses on the armed forces development programme, Rs1 trillion was spent on defence in nine months, which was Rs119 billion, or nearly 14%, more than last year.
Gross revenues swelled to Rs6.4 trillion and Rs2.95 trillion of federal taxes were transferred to provinces.
With a net income of Rs3.44 trillion, cumulative spending on debt servicing and defence jumped to over Rs4.6 trillion, Rs1.1 trillion more than the government’s net income. It suggested that Pakistan would continue to face the debt trap.
Furthermore, development expenses amounted to only Rs329 billion in nine months, as compared to Rs452 billion in the same period of last year, showing a reduction of 27%.
The government paid Rs524 billion in subsidies during the first half of current fiscal year.
Under the IMF programme, Pakistan had committed to converting its primary deficit, calculated after excluding interest payments, into a surplus of 0.2% of GDP, down from last fiscal year’s 3.1%. As a result of uncontrolled spending, however, the government will miss the target.
During the recent review talks, the IMF agreed to relax the primary budget deficit ceiling to 0.5% of GDP. Details have not yet been made public due to the delay in reaching a staff-level agreement.
Moreover, the federal budget deficit widened to nearly Rs3.54 trillion in the first nine months of FY23, as the gap between expenses and revenues was equal to 4.2% of GDP. In absolute terms, the deficit was 12% more than last year.
But due to the inflated size of the economy, the deficit was reduced by half a percentage point, thanks to nearly 37% inflation.
During the current fiscal year, the federal government’s total expenditure shot up to over Rs7 trillion, an increase of 17%. Current expenditure rose to Rs6.7 trillion, up by 21%. Non-tax collection increased to Rs1.24 trillion in nine months, higher by Rs258 billion or 26%.
Published in The Express Tribune, May 6th, 2023.
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