ISLAMABAD Pakistan’s debt servicing costs are increasing by over 64% this year, much exceeding the 30% growth in revenue and leaving little money for development.
The Ministry of Finance (MoF), in its Mid-Year Budget Review Report for FY2023–24, attributed this dire circumstance to the record high interest rates implemented in compliance with IMF directives.
According to the report, “the main challenge was rising markup payments in the wake of a high policy rate environment.” It also stated that, in the first half of 2023 (July–Dec.), “interest expense stood at around Rs4.2 trillion,” up from Rs2.573tr in the same period the previous year, or a 65 percent rise. This year’s interest payments have increased at a far faster rate than the ministry of finance had predicted, totaling Rs7.3tr, or about 58 percent of the total budgeted amount for the year.
Consequently, about eighty percent of both domestic and foreign borrowing went into interest payments rather than being directed toward regions and industries that improve the lives of the general people or that are productive.
The dilemma is attributed to the Finance Ministry’s high interest rate; the use of uplift money is problematic at Rs 158 billion.
“Paying interest accounted for a significant portion of current expenses (65.3 percent of total current expenses) from July to December. Of the total amount spent, Rs. 4.22 trillion was used to pay interest on domestic debt and Rs. 502 billion to pay interest on foreign debt.
So it makes sense that, out of its yearly allotment of Rs950 billion, the use of development funds failed to reach just 16.6% of the total in half of the year, at Rs158 billion.
According to the government’s financial promise, relevant agencies should receive 50% of the development budget, with 20% going to them in the first quarter and 30% in the second.
However, the MOF’s mid-year report showed that the 3-month objective for development spending could not even be approached in six months. According to the MoF, domestic debt accounted for 88 percent of interest payments. During the first half of this year, the federal fiscal deficit grew to Rs2.697tr, or 2.5pc of GDP, from Rs1.78tr, or 2.1pc of GDP, during the same period last year.
The contribution of the provinces
Provinces did, however, provide a larger cash surplus this year—Rs289 billion—than they did previous year—Rs101 billion. The overall deficit, which was 2.3% of GDP last year compared to 2.3 percent this year, persisted.
Compared to Rs890bn, or 1.1pc of GDP, the primary account, which is the receipts less the expenses (apart from interest), maintained surplus on the higher side at 1.7pc of GDP (Rs1.8tr).
According to the midyear evaluation, domestic sources accounted for 77% of the federal fiscal deficit’s funding. Overall receipts increased by 63 percent from July to December as a result of a notable growth in both tax (30 percent) and non-tax (117 percent) income.
Net revenue receipts increased to Rs4.013tr in absolute terms from Rs2.463tr during the same period in the previous fiscal year.
According to the MoF, it actively pushed the federal cabinet-approved austerity measures. Non-essential expenses, such as the hiring of new employees and the import of durable items and cars, were monitored. Since the start of the current fiscal year, there has been strict oversight and monitoring about spending, which has improved expenditure management and strengthened budgetary discipline.
The government declared an overall primary surplus of Rs1.812tr, indicating that it was successful in limiting other expenses despite paying record interest.
Revenue increases by 30%
The Federal Board of Revenue (FBR) collected Rs4.469tr during the July–Dec FY2023–24 period, up 30.3pc from Rs3.43tr the previous year.
However, non-tax revenues (NTR)—more specifically, the central bank’s profit from high interest rates and the petroleum levy—were the true source of the financial windfall.
With 66.8% of the yearly objective reached in the first half, the NTR collection stayed significantly above targets. This is a 117pc increase over the same period last year.
42 percent of each budget was allotted for running the civil government and the armed forces, respectively. According to the MoF, re-appropriations and technical supplementary funds were used to meet unanticipated needs over the six-month period, and no further grants were provided by the government.
The ministry asserted that in order to speed up the development process, the uplift money disbursement system was streamlined.
