The government of Pakistan has set a high target to borrow a significant amount of money, totaling Rs11.10 trillion, from domestic banks in the first quarter of the current fiscal year. This money will mainly be used to repay old debt and partially finance the large fiscal deficit.
This is the third consecutive month in which the government has set record high borrowing targets, indicating its heavy reliance on debt to cover planned expenses. However, there are concerns about the sustainability of this approach as both domestic and external debt levels have reached worrisome levels, requiring restructuring.
To address this situation, the government needs to either reduce non-essential expenses by cutting budgets and controlling excessive spending or focus on increasing revenue collection. In the previous fiscal year, revenue collection fell short of the target, resulting in a deficit.
After debt repayments, the government’s largest expense is paying interest on the overall debt, leaving limited resources for development projects and job creation. Bank of America Securities has highlighted that Pakistan is currently facing a serious liquidity crisis in managing its debt, which poses a direct threat to its financial stability.
The budget parameters for the fiscal year 2023/24 show that debt servicing costs alone exceed half of the total budget spending and around 80% of expected tax revenues.
Additionally, Pakistan’s total foreign exchange reserves have reached a historically low level, providing coverage for only a short period of imports. Despite the country’s debt being moderate compared to its economy, sustaining this level of debt is becoming increasingly challenging.
