The government of Pakistan has announced its plan to borrow a record Rs9.44 trillion from domestic commercial and Shariah-compliant banks over the next three months ending July 2023. The amount is needed to repay some of the maturing debt and finance expenditures.
According to the State Bank of Pakistan’s data, the government will acquire massive funds to repay old debt of Rs8.05 trillion, adding a net Rs1.38 trillion over three months to the total domestic public debt. This move comes as the domestic public debt has grown to “unsustainable levels” due to the choking of foreign loans following the stalled International Monetary Fund loan programme since November 2022.
Economist Sana Tawfik from Arif Habib Limited stated that the latest addition to net debt would widen the government’s fiscal deficit. The fiscal account is facing mounting pressure due to the continuous piling up of domestic debt and the surge in interest payments after a hike in key policy rates to a record high of 21%. These factors have grown to unsustainable levels over a period of time.
Total domestic debt has soared to Rs38 trillion as of December 31, 2022, constituting 45% of Pakistan’s gross domestic product and 53% of total public debt, including external liabilities. Debt servicing on domestic debt is estimated at close to Rs5.6 trillion in the current fiscal year, which is equal to 76% of the tax revenue collection by the Federal Board of Revenue.
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The government has three options, according to Tawfiq: creating some fiscal space to boost the national economy, restructuring public debt, or paying off debt through printing new currency notes. Restructuring the debt carries high solvency risks for some domestic banks, while printing new currency notes would further increase inflation in the country, which is already running at a six-decade high of 36.4%.
Banks are currently offering financing at a historically high markup of 22% in the backdrop of the surge in central bank’s key policy rate to 21%. The breakdown of central bank data shows that the government aims to borrow Rs7.50 trillion by selling three to 12-month treasury bills during May-July 2023. It also plans to borrow another Rs1.49 trillion via auction of two-year to 30-year Pakistan Investment Bonds at fixed and floating rates and 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 and has to pay off Rs647 billion for the maturing long-term PIBs in May to July.