The government has targeted to borrow Rs4.82 trillion over the next three months (March-May) from local commercial banks to partially pay back the previous loans and to partly finance the budget expenditures in the ongoing fiscal year 2021.

The government usually finances budget expenditures through tax collection, profit earned from state-owned entities and sell-off of loss-making enterprises.

Though the revenues under such heads surged during the first eight months (Jul-Feb) of the current fiscal year, budget expenditures remained even higher, compelling the government to raise fresh debt to finance the budget deficit.

The government is expected to add fresh debt worth Rs840 billion in the domestic economy over the next three months.

Details suggest that it would raise debt worth Rs4.82 trillion through auction of its debt securities to commercial banks. Out of this, Rs3.98 trillion would be used to pay off previous loans to banks while the remaining Rs840 billion would be utilised to finance budget deficit in FY21, according to the auction calendar of the State Bank of Pakistan (SBP) issued on Friday.

The increase in fresh debt would force the government to increase taxes on multiple heads and toughen the challenge of increasing taxpayers for the economic managers in a bid to pay off the growing debt.

In his latest move, Prime Minister Imran Khan approved withdrawal of income tax exemptions worth Rs80 billion on Friday which was one of the several conditions laid down by the International Monetary Fund’s (IMF) for revival of loan programme worth $6 billion.

“The government raises debt to finance expenditures such as transfer of funds to provinces, paying off pervious debt and debt servicing (interest money on debt) and defence expenditures,” said Pak-Kuwait Investment Company Head of Research Samiullah Tariq.

The government has devised a strategy to reduce its cost of borrowing, which will in turn decrease some of the debt burden on the economy.

“It has planned to raise debt through auction of long-term tenure papers rather than short-term ones and through auction of papers that offer variable rate of profit rather than fixed-rate ones,” Tariq said in comments to The Express Tribune. “It has also decided to raise higher amount of debt through Shariah-compliant Sukuk as opposed to conventional bonds.”

He said that the government has planned to add net debt worth Rs3 trillion during the ongoing fiscal year 2021. It has raised almost half of this amount in the first half (Jul-Dec) and it is determined to borrow the remaining Rs1.5 trillion during second half (Jan-Jun) of the year, he said.

“Almost 70% of the total debt amounting to Rs1.5 trillion during the first half of the ongoing fiscal year was raised through domestic borrowing, while the remaining 30% was raised through foreign grants and borrowing and privatisation proceeds,” Tariq added.

During the first half, the government paid back more to banks than it raised in form of new debt in a bid to settle the previous debt acquired through three to 12-month market treasury bills (MTBs).

The breakdown suggests that the government plans to raise Rs4 trillion through auctions of short-term MTBs during March-May 2021. Out of this, around Rs3.7 trillion would be used to pay off the previous loans raised through MTBs.

The leadership would raise Rs375 billion through auction of three to 30-year Pakistan Investment Bonds (PIBs). The PIBs would be based on fixed rate of profit. Out of this, Rs287 billion will be utilised to pay off previous debt secured through PIBs.

Besides, it would raise another Rs450 billion through two to five-year tenure PIBs based on variable rate of profit. The floating rate could be adjusted upward or downward depending on the changes in the benchmark interest rate which stands at 7% at present.

Pakistan’s outstanding local debt surged slightly over 4% (or Rs1.43 trillion) to Rs36.54 trillion in the first seven months (Jul-Jan) of the current fiscal year compared to Rs35.11 trillion recorded on June 30, 2020, according to the central bank.

The Federal Board of Revenue (FBR) has collected Rs2.91 trillion in tax revenues during the first eight months of the current fiscal year. This is almost Rs13 billion higher than the set target for the collection in the eight-month.

Published in The Express Tribune, March 7th, 2021.

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