The cash-strapped government of Pakistan has announced that it will borrow a record Rs9.44 trillion from domestic commercial and Shariah-compliant banks, an amount needed to repay some of the maturing debt and finance expenditures over three months ending July 2023.
According to the State Bank of Pakistan’s (SBP) data, the government will acquire massive funds to repay old debt of Rs8.05 trillion. As a result, it will add a net Rs1.38 trillion over three months to the total domestic public debt, which has grown to “unsustainable levels.”
Market talk suggests that Rs9.44 trillion is the single largest bank financing being availed of by the government but it cannot be confirmed officially till the filing of this report.
Arif Habib Limited economist Sana Tawfik said the government set such a huge borrowing goal in the wake of growing reliance on domestic debt following the choking of foreign loans due to the stalled International Monetary Fund (IMF) loan programme since November 2022.
She said the latest addition to net debt would widen the government’s fiscal deficit. “Fiscal account is facing mounting pressure for two major reasons which include continuous piling up of domestic debt and the surge in interest payments after a hike in key policy rate to record high at 21%.”
Both things – domestic debt and interest cost – “have grown to unsustainable levels over a period of time.”
Total domestic debt soared to Rs38 trillion as of December 31, 2022, which constituted 45% of Pakistan’s gross domestic product (GDP) and 53% of total public debt (including external liabilities).
Debt servicing (mark-up cost) on domestic debt is estimated at close to Rs5.6 trillion in the current fiscal year 2022-23, which is equal to 76% of the tax revenue collection by the Federal Board of Revenue (FBR).
According to Tawfiq, at present the government has two options: to create some fiscal space to give a significant push to the national economy or restructure the public debt. “It can cut non-development expenditure and enhance tax revenue receipts by increasing the number of taxpayers.”
The restructuring, however, is difficult. It carries high solvency risks for some domestic banks. Moreover, there should be the option of liquidity supplies from the central bank and the IMF must be on board as well.
The third option would be to pay off debt through printing new currency notes but it would further increase inflation in the country, she added. Inflation is already running at a six-decade high at 36.4%.
At present, banks are offering financing at a historically high mark-up of 22% in the backdrop of the surge in central bank’s key policy rate to 21%.
Moreover, the breakdown of central bank data shows the government has targeted to borrow Rs7.50 trillion by selling three to 12-month treasury bills (T-bills) during May-July 2023. It aims to borrow another Rs1.49 trillion via auction of two-year to 30-year Pakistan Investment Bonds (PIBs) at fixed and floating rates.
Additionally, it intends to acquire financing of Rs450 billion by selling Sukuk to Shariah-compliant banks over three months.
The government is scheduled to pay Rs7.08 trillion for the maturing T-bills mainly in installments around June 2023. It also has to pay off Rs647 billion for the maturing long-term PIBs in May to July.
Published in The Express Tribune, May 13th, 2023.
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