• Debt swells due to growing interest payments, rupee depreciation.
• Debt rises by 22.5% in 10 months (July-April) of this fiscal year.
• Govt is likely to set budget deficit target of 6.4% of GDP.

KARACHI: Owing to high funding requirements, a lack of dollar inflows, currency depreciation, and growing interest payments amid a tight monetary policy, the government’s debt grew 34.1% at the end of April from a year earlier, The News reported citing central bank’s data.

According to the data released by the State Bank of Pakistan (SBP), the total debt reached Rs58.598 trillion as of April 30, compared with Rs43.705 in the same period last year. 

The debt increased by 2.6% month-on-month as it stood at Rs57.123 trillion in March.

The public debt is growing at a faster pace owing to the increasing financing needs of the government. The foreign currency inflows remained dried amid the stalled International Monetary Fund (IMF) loan programme. 

The centre was forced to take on more domestic debt as a result of the low revenue and the excessive expenditure requirements. Additionally, the weaker currency caused an increase in external debt measured in rupees.

The debt climbed by 22.5% in 10 months (July-April) of this fiscal year. It had come to Rs47.832 trillion by the end of June. According to the SBP’s data, the increase in public debt was caused by an increase in external debt, which is a result of currency depreciation. 

Over the course of a year, the rupee declined by about 53%. In April 2023, it was trading at 283 per dollar, up from 185 in the same month the year before.

At the end of April, the domestic debt surged by 26.4% year-on-year to Rs36.549 trillion. The domestic debt rose by 17.57% during the 10 months of this fiscal year. 

The foreign debt sharply increased by 49.1% to Rs22.050 trillion as of April from Rs14.791 trillion a year ago. The external debt grew by 31.6% in the period July–April fiscal year 2022-23.

Pakistan is caught in the debt trap because of its unsustainable levels of domestic debt and markup payments, according to analysts. The government can choose to restructure the debt in order to create fiscal space to boost the economy. 

However, there is a significant chance that the exercise may harm domestic banks and the economy as a whole.

‘Unrealistic revenue and fiscal deficit targets’

The government may set unrealistic revenue and fiscal deficit targets in the upcoming budget for the fiscal year 2023-24, according to analysts, who also expressed concern about rising interest costs for domestic debt.

The government is likely to set a tax revenue collection target of Rs9-9.2 trillion for FY2024 (8.6% of GDP), which is up 21% from the target of Rs7.5 trillion for FY23 and 29% higher than expected tax collection in the current fiscal year, said Topline Securities in a report.

“Total tax collection for FY23 is expected to clock in at Rs7-7.1 trillion below the target of Rs7.5 trillion due to the economic slowdown,” it said.

“Government is likely to set aside Rs7.6-8 trillion (7.1-7.5% of GDP) for interest payment for FY24 budget. This is against Rs5.2 trillion (6.2% of GDP) likely in FY23,” it added. 

Rising debt and record high-interest rates are responsible for a huge jump in markup payment from Rs3.2 trillion in FY22 to Rs8 trillion in FY24, an increase of 151% in two years limiting government to spend on development, health, education, etc, according to the report.

“This is alarming as markup expenses for FY24 will be 88% of total tax revenue compared to the last 10-year average of 48%,” it noted. 

For FY24, the government is likely to set a budget deficit target of 6.4% of GDP, or Rs6.8 trillion. 

“We believe that the main reason for the higher budget deficit in FY24 will be higher markup costs and inaccessibility to bumper FY24 SBP profits due to changes in the SBP Act in early 2022,” the Topline report stated.