As the possibility of a slight surge in the policy rate looms, Pakistan's overall debt servicing for the current fiscal year is on track to reach a historic high of Rs8 trillion, surpassing the allocated budget of Rs7.3 trillion.
This fiscal development poses challenges as federal revenue receipts are projected to fall short of debt servicing requirements, creating concerns for the Ministry of Finance.
For the fiscal year 2023-24, it is anticipated that federal revenue receipts will consistently lag behind the mounting debt servicing needs, marking a concerning fiscal imbalance. The Ministry of Finance is keen on maintaining the current policy rate at 22 percent and seeks to avert any further increase.
Pressure on policy rate
Official sources indicate that in the latest auction of Treasury bills (T-bills) and Pakistan Investment Bonds (PIBs), the government raised Rs1.4 trillion at a weighted average markup rate slightly exceeding 23 percent. This development sets the stage for a potential policy rate hike during the upcoming Monetary Policy Committee (MPC) meeting scheduled for September 14.
However, some economists argue that restructuring domestic debt can only be considered once a lower interest rate environment is achieved, contingent on the reduction of inflationary pressures.
Recent measures against dollar smuggling have led to improvements in the exchange rate, strengthening the Pakistani rupee against the US dollar. As a result, the possibility of a substantial 2 percent policy rate hike has diminished.
Now, expectations point towards a more moderate increase of 1 to 1.25 percent, or potentially keeping the rate unchanged, primarily to signal support for an investment-friendly climate.
Nevertheless, the rates for T-bills and PIBs have already risen, causing the debt servicing burden to escalate, potentially exceeding Rs8 trillion for the current fiscal year.
Revenue challenges for govt
The Federal Board of Revenue (FBR) has set an annual tax collection target of Rs9.4 trillion. After fulfilling provincial resource requirements under the NFC Award, the federal government is estimated to have approximately Rs4 trillion in net revenue receipts, assuming the FBR meets its tax collection target without any setbacks.
With a non-tax collection target of Rs2.9 trillion, the federal government's net revenue receipts could reach Rs7 trillion. However, with debt servicing expenses anticipated to reach Rs8 trillion, there will be a need for additional borrowing by the government.
The evolving fiscal landscape poses significant challenges for Pakistan's economic stability, with concerns arising over the sustainability of the debt burden and the need for prudent fiscal managemen