Amir Khan

Pakistan's escalating debt burden has reached alarming levels, as the government increasingly relies on borrowing for budgetary support. According to the State Bank of Pakistan, government borrowing has seen a significant increase over the past year, rising sharply from Rs3.75 trillion to Rs7.48 trillion. In addition, the government’s excessive borrowing trend appears to continue into the new fiscal year. Within the first 40 days alone, between July 1 and August 9, 2024, budgetary borrowing skyrocketed more than tenfold to Rs556 billion from Rs51.2 billion during the same period last year, as reported by the SBP.

 Moreover, this surge is primarily driven by the pressing need to service the existing domestic debt, overshadowing the government's ability to allocate resources toward developmental initiatives. Despite a reduction in interest rates by the SBP, which might lower the cost of domestic debt servicing, significant declines in government borrowing are unlikely. The current fiscal framework, marked by a stringent and arguably harsh tax regime, has not generated sufficient revenue to cover the government's expenses.

Debt servicing remains the largest expenditure, including the repayment of principal amounts and interest on the existing stock of domestic and external debt. Currently, Pakistan is in a debt trap, where almost all net tax revenue is directed toward servicing debts. This leaves little to no room for other expenditures, including administrative costs, which then must be financed through further borrowing.

According to Finance Minister Muhammad Aurangzeb, Pakistan is unlikely to receive funds from the International Monetary Fund (IMF) before the end of September. Meanwhile, countries like Saudi Arabia, China, and the United Arab Emirates (UAE) are hesitant to roll over their previous loans in full. Furthermore, under these circumstances, relying on an ideal performance of the export sector or continued growth in remittances appears overly optimistic and somewhat detached from reality.

Additionally, as per the SBP data, Pakistan’s current account deficit (CAD) has decreased significantly, from $741 million in July 2023 to $162 million in July 2024. This reduction is largely due to a boost in goods and services exports and a temporary decrease in the import of services, particularly IT and IT-enabled services. However, the sustainability of this improvement is questionable. While goods exports have shown some growth, their pace may not outstrip that of imports due to various structural issues, including high production costs driven by energy price hikes and inefficiencies in key sectors like textiles, sugar, and automobiles.

The outlook for Pakistan’s economy remains uncertain, particularly with potential setbacks in services exports, especially in the IT sector. To overcome the debt cycle and strengthen the economy, Pakistan should prioritize enhancing domestic resources, expanding export-oriented industries, and reducing dependence on external debt.

Credit: INP-WealthPk