Fiscal year 2024 is shaping up to be another arduous chapter in the government’s fiscal management journey. Despite improvements in revenue collection and the resurgence of external debt inflows in June and July, the government’s reliance on domestic debt is expected to persist. This reliance, however, comes with a significant burden of high interest payments and substantial foreign debt repayments. These financial commitments are poised to consume a major chunk of available resources, leaving limited funds for developmental projects aimed at revitalising the economy.
Over the next three months (August-October 2023), the government has set its sights on borrowing a staggering Rs11.09 trillion from domestic commercial banks. This ambitious target closely mirrors the all-time high goal of Rs11.10 trillion set for the July-September 2023 period in the previous month of July, as revealed by data from the State Bank of Pakistan (SBP) on Monday.
Initial expectations from government authorities and financial experts indicated that the government’s reliance on domestic borrowing would diminish once external inflows resumed. This forecast became reality in June-July 2023, following the approval of a new IMF loan programme of $3 billion for a nine-month duration.
Speaking to The Express Tribune, Sana Tawfik, an economist at Arif Habib Limited, highlighted the ongoing challenges in fiscal year 2024, which commenced on July 1. She emphasised the persistent need for substantial interest payments and social spending throughout the year.
“Our estimates place interest payments at around Rs8 trillion for FY24, accounting for over half of the total budget outlay of Rs14.5 trillion for the year,” Tawfik stated, noting that the government’s own projection places payments at Rs5.6 trillion for the same period.
The government’s heavy reliance on domestic borrowing is set to remain largely unchanged, as foreign inflows are scarcely sufficient to cover external expenditures, including maturing foreign debt repayments and debt servicing costs that are anticipated to total around $24.5 billion throughout FY24.
In its economic update and outlook for July 2023, the Ministry of Finance disclosed a 20% upswing in total spending to reach Rs8.85 trillion during the July-May period of FY2023, compared to Rs7.36 trillion in the previous year. Within this total, current expenditure witnessed a 22% growth to reach Rs8.34 trillion for July-May FY2023, compared to Rs6.84 trillion in the preceding year.
The ministry attributed the entire increase in current spending to an 80% surge in markup payments, driven by a higher policy rate that currently stands at a record 22%.
However, non-markup spending faced a 12% reduction, mainly attributed to a 31% decline in subsidies and a 32% decrease in grants. Notably, an increase was observed in grants for social spending under the Benazir Income Support Programme (BISP) and poverty alleviation funds. This shift indicates the government’s commitment to pro-poor spending while creating fiscal space through reductions in non-productive expenses, said a statement.
In an effort to enhance domestic resource mobilisation for FY2024, the government is implementing various measures. The SBP’s withdrawal of import restrictions is expected to generate demand for imports and contribute to improved revenue generation.
Published in The Express Tribune, August 8th, 2023.
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