THE federal government’s total debt stock soared by above 11pc year-over-year to Rs70.4tr at the end of November, new State Bank data shows. But that does not come as a major surprise; debt growth is primarily driven by fresh borrowings for budgetary support. However, the pace of debt accumulation during the current fiscal year has been slower than expected as the stock rose by just 2pc in five months. It is the decreasing burden of interest payments on the back of falling interest rates, and a drastic improvement in the primary balance, which determines the size of the loans that the government must secure to cover the income gap. The SBP slashed its policy rate by 900 bps to 13pc since June as headline monthly inflation plunged to a single digit. Likewise, the primary balance has improved to 2.4pc of GDP from 0.4pc in the last fiscal year. The record non-tax revenue contributed by the SBP from its profits has also helped the government throw up a fiscal surplus of 1.4pc of GDP.

While the government has accumulated fresh debt in the first five months of the year, the SBP data shows that federal and provincial borrowings from the scheduled banks for budgetary support have experienced a significant decline with debt retirement of slightly over Rs2tr against borrowings of Rs2.89tr in the same period in FY24. The federal government repaid an amount of Rs1.575tr to the banks compared to Rs3.4bn of borrowings a year ago. The future debt trajectory largely depends on the Federal Board of Revenue’s performance and a decrease in wasteful public expenditure through the restructuring and sale of state-owned enterprises, besides a drastic reduction in the size of the oversized federal government. The rise in federal debt highlights persistent fiscal challenges as Pakistan navigates one of its severest economic crises, marked by heightened borrowings, to address budgetary deficits as well as balance-of-payments troubles. The situation underscores the need for structural reforms to ensure sustainable fiscal management and to reduce reliance on short-term debt. This is precisely what the SBP had emphasised in its latest monetary policy statement released last month when it called for continued fiscal consolidation to support macroeconomic stability and reiterated the need for fiscal reforms, focusing on broadening the tax base and curtailing the SOEs’ losses.

Published in Dawn, January 8th, 2025