July interest payments surpass govt income
In yet another significant deterioration, the fixed rate debt reduced from 26% to just 22.6% of the domestic debt, increasing the interest rate risks. PHOTO: file
Interest payments in July increased alarmingly to Rs537 billion, surpassing the federal government’s net income for the month by Rs156 billion. This has raised concerns that the annual debt servicing cost may exceed budget allocations due to rising interest rates.
Provisional federal fiscal operations for July, marking the beginning of fiscal year 2023-24, have indicated that Pakistan’s debt situation is no longer sustainable. The country is now borrowing primarily to meet interest payments, which is contributing to an elevated debt burden.
Government officials reported that in July, the federal government paid Rs537 billion in interest payments, while its net income stood at a mere Rs381 billion, falling short of interest payment needs by 41%. Just a year ago, the net income was sufficient to cover interest payments, but that scenario has changed.
Another worrisome indicator is that the Rs537 billion interest payments equalled the tax collection by the Federal Board of Revenue (FBR) in July.
This revelation coincided with skyrocketing interest rates, forcing the federal government to borrow at historically high rates, including a rate of up to 24.5% on Wednesday for a three-month period.
The federal government borrowed Rs1.3 trillion at a rate of 24.5% for three months, which was 2.5% higher than the key policy rate. However, debt managers argued that a majority of the Rs1.3 trillion was borrowed at a 23.25% rate. The government raised Rs926 billion at 23.25% interest rate resulting in an average borrowing cost of 23.39%.
Market sentiment appeared reluctant to lend money to the government due to reports that the central bank was considering increasing the key policy rate to 25%, although the State Bank of Pakistan (SBP) denied these reports. The SBP-dominated Monetary Policy Committee is scheduled to meet on September 14, with analysts expecting further tightening of monetary policy due to rising inflationary pressures.
The federal government had no choice but to secure these costly loans due to its cash buffers being nearly Rs1.5 trillion less than emergent needs. Against almost Rs1.2 trillion in cash buffers, the government was scheduled to make Rs2.05 trillion in debt repayments.
Similarly, Rs310 billion in interest payments were due within this week, including on external loans, said sources. Additionally, around Rs80 billion was due to the Benazir Income Support Programme (BISP) beneficiaries.
For the current fiscal year, the federal government has allocated Rs7.3 trillion for debt servicing, with some officials in the Ministry of Finance suggesting that the cost may exceed Rs8 trillion.
In the previous fiscal year, the federal government missed its budget targets and failed to restrict fiscal operations to the level agreed upon with the International Monetary Fund (IMF) in February. The last year witnessed actions taken by the coalition government that were entirely out of line with prudent fiscal management, leading to a substantial increase in public debt from Rs44 trillion in March 2022 to Rs61.8 trillion by July this year.
In July, the federal government’s total expenditures surged by 20% compared to the same month the previous year, reaching Rs645 billion.
The federal government resorted to borrowing for all its activities, even including defence expenditures. However, in a questionable move, the government recently assumed responsibility for a $1.8 billion polio eradication programme this week. Development spending also witnessed significant growth, rising to Rs16 billion from Rs5 billion the previous year.
Under the IMF programme, Pakistan is committed to generating a primary budget surplus. Provincial governments contributed a surplus of only Rs39 billion, compared to Rs97 billion the previous year. Tax collection by the FBR remained stable at Rs538 billion, against Rs437 billion last July.
Non-tax revenues witnessed a substantial increase, totalling Rs139 billion compared to Rs41 billion the previous year, primarily due to petroleum levy collection. Gross federal revenue receipts amounted to Rs678 billion, an increase of Rs200 billion from the previous year. However, the federal government’s total net income, after transferring provincial shares, stood at just Rs381 billion, not enough to finance interest payments.
Published in The Express Tribune, September 8th, 2023.
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