Moaaz Manzoor

The government’s aggressive Rs6.8 trillion borrowing plan may ease its fiscal pressure but risks crowding out private sector credit, tightening liquidity, and slowing economic growth, reports WealthPK.

The State Bank of Pakistan (SBP) has unveiled its auction calendar for Pakistan Investment Bonds (PIBs) and Market Treasury Bills (MTBs), aiming to raise Rs6.8 trillion between February and April 2025. This borrowing plan includes Rs2,900 billion from MTBs and Rs3,925 billion from PIBs — comprising Rs1,050 billion from fixed-rate PIBs and Rs2,875 billion from floating-rate PIBs. Since bond maturities amount to Rs3,092 billion during this period, the aggressive borrowing signals a substantial fiscal deficit, limits private sector credit, and poses inflationary risks.

Meanwhile, economic indicators show the rupee depreciating slightly, the broad money supply expanding, and global market movements affecting the commodity prices. Experts argue that the government’s reliance on domestic borrowing stems from its reluctance to introduce additional taxes or implement a mini-budget, as Dr. Nasir Iqbal, Head of the Macro Policy Lab at PIDE, noted. “The prime minister has directed that ‘we don’t want to bring in a mini-budget, and we don’t want to impose a new tax.’

So, what are the alternatives?” He explained that the past tax hikes were unpopular among the salaried individuals, and the policymakers were now seeking alternative means to address the fiscal shortfall. While tax rationalization remains a consideration, heavy borrowing from the domestic banks is the chosen route. “Considering the government’s target of raising Rs6.8 trillion, particularly Rs3.93 trillion from the money market, this will likely improve liquidity for the government, thus reducing liquidity for the investors,” Dr. Iqbal observed.

Ali Najib, Head of Equity Sales at Insight Securities, emphasized that the government’s borrowing strategy now relied more on domestic banks and institutions than foreign investors. “The banks might demand higher yields to compensate for inflation risks and policy uncertainty,” he noted. This expectation could put upward pressure on the interest rates, making it more expensive for businesses to access credit.

In an already high-interest-rate environment — where the policy rate stands at 12% — such a scenario could discourage private-sector investment, slow down economic growth, and exacerbate Pakistan’s debt burden. The consequences of excessive government borrowing extend beyond immediate liquidity constraints. When the banks prioritize lending to the government over private enterprises, businesses struggle to secure financing for expansion, innovation, and job creation.

As a result, economic activity could weaken, leading to lower revenue collection and further increasing the need for borrowing — a cycle that could threaten fiscal sustainability. While government borrowing is necessary for managing fiscal deficits, its impact on private-sector credit availability underscores the importance of balancing short-term fiscal needs with long-term economic stability.

Credit: INP-WealthPk