KARACHI: The government made a hefty borrowing of Rs2.57 trillion from the State Bank of Pakistan (SBP) in January 2019, which pushed the outstanding loans to Rs7.42 trillion at the end of the month, according to the central bank report.
Analysts pointed out that the government increased borrowing by a massive 53% to meet budgetary shortfall, which was continuously widening due to low tax revenue collection and higher debt servicing and defence spending.
“The government is continuously borrowing from the central bank to meet the budgetary shortfall,” commented Sherman Securities’ analyst Chander Kumar while talking to media.
The borrowing could exacerbate problems for the government rather than solving them. “Higher borrowing will push inflation to the next high level as core inflation (non-energy and non-food) has continued to remain on an uptrend for quite a long time,” he said.
Arif Habib Limited Head of Research Samiullah Tariq highlighted the other day that higher debt servicing and defence spending and low revenue collection were widening the fiscal deficit, which rose to a six-year high of 1.3% in the second quarter ended December 31, 2018.
“While the overall expenditure growth remained unchanged despite a sizeable cut in development spending, it was the marked slowdown in revenue growth that increased the fiscal gap. In fact, the revenue growth fell short of the rise in current spending as well as non-interest expenditure. This weakened the government’s capacity to finance its operational expenses (leading to a higher revenue deficit) and also made it challenging to manage its debt (primary deficit),” the central bank said in its latest quarterly report on the state of economy released recently.
The slowdown in tax revenue can be attributed to a number of factors which include a sharp reduction in the sales tax applied to major petroleum products in July 2018, reduction in corporate and personal income tax rates announced by the government in Q4FY18, sharp fall in Public Sector Development Programme (PSDP) spending, which lowered the withholding tax collection from contractors, and overall slowdown in the economy, particularly in the construction-allied industries, which led to lower collection from cement and steel sectors, it said.
On the expenditure front, the major challenge was a steep rise in debt servicing, which grew 13.9% during Q1FY19 compared to 7.5% last year. The higher growth can be due to rising interest rates amid a large (and increasing) volume of public debt, and also because of rupee depreciation, which increased the rupee value of mark-up payments on the external debt.
“Other current expenditures of both the federal (especially defence-related) and provincial governments also grew sharply,” the central bank said.
The higher interest rate has made it difficult for the private sector to continue relying on bank borrowing to finance their day-to-day expenses and borrow for expansion and/or setting up new projects.
Resultantly, the outstanding loans to the private sector came down for the first time in first seven months (July-January) of the current fiscal year 2019.
Outstanding loans to private-sector businesses inched down to Rs5.09 trillion in January compared to Rs5.1 trillion in the previous month of December 2018, the central bank reported.
“Credit to private sector may continue to drop following a staggering 4.5-percentage-point increase in key interest rate (since January 2018 to a six-year high of) 10.25% at present,” Kumar said.
“The drop in credit (to the private sector) indicates shrinking domestic demand and a slowdown in GDP (gross domestic product) growth,” he said.
“We expect the GDP growth to slow down to 3-3.5% in the current fiscal year in contrast to a 13-year high growth of 5.8% in the last fiscal year,” he said.
