An amount of Rs3.2 trillion used for debt servicing and defence
Uncontrolled spending may result in the government missing the deficit target set by the IMF; consequently, this could have potentially serious implications. Therefore, it is essential that spending is monitored and controlled in order to ensure that the target is met.
ISLAMABAD: Despite reluctance to opt for debt restructuring, interest expenses have skyrocketed to Rs2.57 trillion in the first half of the fiscal year, making up 65% of the annual debt servicing budget and forcing the government to cut out all other expenses, except those on defence.
According to sources in the Ministry of Finance, this marks a 77% increase compared to the same period of the previous year. As a result, all non-development expenditures have been reduced by 15%, while development expenses have been cut by 50%, in order to create room for other expenses.
The finance ministry paid Rs2.57 trillion in interest costs, an increase of Rs1.1 trillion or 77% compared to the previous financial year. Despite budgeting Rs3.95 trillion for interest expenses in the current fiscal year, 65% of that has already been consumed in the first six months. Consequently, the Monetary Policy Committee of the central bank is set to meet on Monday to consider the possibility of raising the interest rate further in order to tackle inflation and attract foreign inflows.
Earlier this month, Finance Minister Ishaq Dar warned that the cost of debt servicing may rise to nearly Rs5 trillion in this fiscal year, consequently equalling more than half of this year’s total budget of Rs9.6 trillion. Thus, the nation is facing an alarming situation where its debt servicing costs are drastically increasing.
Despite the precarious situation, the finance ministry seems to be in no mood to appreciate the biggest challenge threatening the country’s long-term viability; there is an urgent need to restructure domestic debt to create some fiscal space.
However, the government has come up with yet another austerity committee as its solution to Pakistan’s “financial challenges”. Sources have revealed that excluding military pensions and expenses on the armed forces development programme, Rs638 billion was spent on defence in six months, Rs118 billion or nearly 23% more than last year and in line with the annual stated defence budget of Rs1.563 trillion.
Consequently, there is a clear indication that the government is not taking the needed steps to restructure domestic debt, despite the challenge it poses to the country’s long-term viability, yet instead opting for austerity measures.
Pakistan is in a difficult financial situation, as demonstrated by the fact that its net income of Rs2.5 trillion is drastically outweighed by expenses of Rs3.2 trillion on debt servicing and defence – an increase of 128%, or Rs708 billion, over the government’s net income.
Although tax collection has increased, expenses are not being curtailed, meaning Pakistan is likely to remain in debt. After unsuccessfully attempting to secure cash injections from foreign nations, Pakistan has resorted to reviving the IMF programme.
Development spending has also taken a hit, with Rs147 billion being spent, which is a 49% reduction from the previous year. Overall, other expenses have dropped by 15%, amounting to Rs1.3 trillion.
Despite Pakistan’s commitment to the IMF programme to convert the primary deficit, calculated after excluding interest payments, into a surplus of 0.2%, its government has missed the target due to uncontrolled spending.
Provisional figures suggest that the federal budget deficit widened to nearly Rs2.2 trillion in the first six months of the current fiscal year, equal to 2.5% of the GDP. Although nominal terms of the deficit were lower than last year, its impact was higher owing to the 25% inflation rate.
In the current fiscal year, the government’s total expenditure has significantly increased by 23% to RS4.7 trillion. Moreover, the current expenditure has grown by 29% to over Rs4.5 trillion compared to last year.
Furthermore, gross revenues of the government went up by 18% to Rs4.3 trillion and Rs1.8 trillion was transferred to provinces as their share in federal taxes, which was 6% higher than last year. In addition, FBR’s tax collection remained at Rs3.342 trillion, up by 14.4%, but it was short of the IMF target by Rs170 billion. Lastly, the non-tax revenues increased to Rs950 billion, up by 33% on the back of higher petroleum levy collection. Overall, it can be concluded that the government expenditure has increased significantly during the current fiscal year.
After incorporating the cash surplus of Rs177 billion achieved by the provincial governments, the overall deficit of the country stood at Rs2 trillion or 2.4% of the GDP, whilst the overall primary balance was Rs586 billion or 0.7% of the GDP. However, there was a stark decrease of 63% in the provincial surpluses compared to the same period a year ago.