Pakistan’s central bank has injected almost Rs6 trillion into conventional and Shariah-compliant banks for up to 28 days, as the government has continued to make record borrowing primarily to make interest payments on debt.
The central bank is now frequently injecting funds into the banking network in the wake of government’s heavy borrowing in recent months, enhancing its outstanding financing for banks to around Rs10 trillion by January 12, 2024 as compared to Rs8.5 trillion at the outset of December 2023.
The government made record high borrowing of Rs3.1 trillion from banks in the first half (Jul-Dec) of the current fiscal year, which was 197% higher compared to Rs1.05 trillion in the same period of last year.
“The fresh debt is close to the full-year borrowing in FY23 that amounted to Rs3.65 trillion,” Alpha Beta Core CEO Khurram Schehzad said in a recent commentary.
According to the State Bank of Pakistan’s (SBP) latest update, the government is targeting to acquire new financing of Rs3.88 trillion from banks in the third quarter (Jan-Mar) of FY24, partly to repay the maturing old debt estimated at Rs1.57 trillion for the quarter.
A big reason for the hefty borrowing is the central bank’s high policy rate, which has been kept at a record 22% since the end of June 2023, according to independent analysts.
A one-percentage-point increase in the policy rate pushes up interest payments by Rs200-250 billion. The central bank jacked up its policy rate by 15 percentage points over 21 months from 7% in September 2021 to 22% in June 2023 to control a stubborn inflation.
Optimus Capital Management Research Analyst Maaz Azam estimated that the government would bear total debt servicing cost of Rs8.5 trillion in FY24, which was significantly higher compared to last year, partly because of increase in debt and the high policy rate.
Read SBP gives Rs1.25tr to meet funding needs of banks
The projected number is similar to the forecast made by the International Monetary Fund (IMF).
This indicates that most of the tax collection of the Federal Board of Revenue (FBR) will be utilised to make interest payments. The FBR is tasked to collect Rs9.4 trillion in taxes in FY24. So far, tax receipts have remained higher than the assigned monthly targets.
Financial experts strongly believe that the burden of interest cost will ease in 2024, as the central bank is expected to slash its policy rate by a total of seven percentage points to 15% by the end of December over expectations of a decrease in inflation.
Besides interest payments, other major expenditures of the government included the payment of monthly salaries and pensions, doling out subsidies and spending on social and development projects to spur economic activities, Azam said.
The government’s total debt, including domestic and foreign, summed up to around Rs65.7 trillion by the end of November 2023.
Alpha Beta Core’s Schehzad added “the caretaker government is heavily borrowing money and creating a massive debt pile without caring about the existing debt burden.”
State borrowing from local banks reached a new high in the last six months. The borrowing, mostly under the caretaker administration, crossed Rs3.1 trillion in Jul-Dec 2023 compared to the Rs3.64 trillion borrowed in the entire previous year.
“This means the caretaker government has already acquired as much debt as the last government took in an entire year.”
At this pace, government borrowing from local banks may end up above Rs6 trillion, up 65% year-on-year, “the highest in a year and already a record for a caretaker setup, pushing the country further deep into the debt trap.”
Debt accumulation at such a fast pace was surprising when tax collections had so far been above targets (due to overburdening the economy, industry and individuals with taxes without broadening the tax net), he said.
“This will continue to cause inflation and potentially lead to the weakening of local currency (resulting in more inflation), while putting more debt burden on the economy, leading to higher taxes (for debt repayment), thereby compromising on investment and growth potential of the country,” he said.
Published in The Express Tribune, January 14th, 2024.
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