The Pak Banker

Economic worries persist

During the last fiscal year, the government’s borrowings for budgetary support had almost doubled to Rs7.48 trillion from Rs3.75tr a year ago, according to the latest statistics released by the State Bank of Pakistan (SBP).

Last year, the government kept borrowing excessivel­y, chiefly to service old domestic debt and not to spend on the country’s developmen­t. During this fiscal year, we may see the same happening again.

In just 40 days of the new fiscal year (between July 1 and August 9 2024) the government’s borrowings for budgetary support have increased more than 10 times to Rs556 billion, according to the SBP, from Rs51.2bn in the same period of the last year. Since the central bank has already started reducing interest rates, the cost of domestic debt servicing may remain lower this year than in the previous year.

However, that doesn’t mean the government’s borrowing for budgetary support would decline significan­tly compared with the past year.

Despite introducin­g a regressive and cruel tax regime in this year’s budget the government does not expect to generate enough revenue to meet its expenses (the largest component of which is debt servicing), installati­on payments for reducing the principal amounts of some loans, and meeting the interest charges on the entire stock of serviceabl­e domestic and external debts.

Even the most conservati­ve estimates show that almost all net tax revenue of this fiscal year will have to be used in servicing domestic and external debts, which means the current expenses of the government, including defence and administra­tive expenses, will have to be met by more debts. Behold, we’re in a debt trap. Once a country is in a debt trap, it can hardly afford to grow because of political unease and uncertaint­y. Increased political stress may hamper the growth of domestic savings and impede the growth of local and foreign investment alike.

Besides, it can also affect the growth of exports and remittance­s depending upon how political strife and uncertaint­y unfold in due course of time. Isn’t it time for the establishm­ent and the political class of this country to rise above their parochiali­stic interests and save the economy? Both are aware of the dangers of a looming wider military conflict in the Middle East that may have an impact on Pakistan’s economy. Both have closely watched the recent revolution in Bangladesh that culminated in the humiliatin­g exit of once-all-powerful prime minister Hasina Wajid.

Further delay in the restoratio­n of a working relationsh­ip between the various segments of the political class could do irreparabl­e damage to the country. The Internatio­nal Monetary Fund (IMF) money isn’t coming in before the end of September, according to Finance Minister Muhammad Aurangzeb. Friendly countries Saudi Arabia, China and the United Arab Emirates still appear to have reservatio­ns about rolling over their previous debts in full.

We should also not forget that the US-Pakistan relationsh­ip now is not as ideal as it was during the Musharraf era, particular­ly after Prime Minister Shehbaz Sharif has already said publicly that Pakistan wants “to reset ties with the US but not at the cost of China”. Under these circumstan­ces, pinning hopes on the ideal performanc­e of the export sector or being optimistic about continued growth in remittance­s can offer an escape from harsh ground realities but nothing more.

In July 2024, the current account (CA) deficit fell to $162 million from $741m in July 2023, which is good news, but one must see how it has come to happen and whether it can be sustained. The CA deficit has declined due to an increase in goods and services exports and a one-time fall in the import of services, particular­ly informatio­n technology (IT) and IT-enabled services. However, two things must be kept in mind: the increase in goods exports during this fiscal year cannot be expected to grow faster than imports due to a very high cost of production thanks to energy price hikes, inefficien­cy of textiles, sugar and automobile sectors and an overall less export-friendly environmen­t.