KARACHI: Pakistan paid Rs1.704 trillion to service its overall debt during the previous fiscal year, said a latest government report.

The report indicated that while interest payments on the debt increased substantially, the repayment of principal amount on external debt fell to Rs358bn from Rs608bn a year ago which helped reduce the overall debt and liabilities servicing by 4.9 per cent.

Interest payments on external debt, however, increased to Rs109.9bn from Rs91bn in the previous fiscal year.

But a sharp increase in domestic interest payments, which saw a year-on-year rise of Rs132bn to reach Rs1.175tr in FY15, seems to be the real problem for the government which, because of severe shortage of revenue, is compelled to borrow more from both external and domestic sources.

The external borrowing has helped the government build foreign exchange reserves to a record $18.5bn this year.

The interest payments on domestic debt are rising each year — the government has paid Rs3.123tr since 2013 — because of large accumulation of debts through Pakistan investment Bonds (PIBs) and treasury bills (T-bills).

Banks and the corporate sector jointly hold PIBs, T-bills and sukuk worth over Rs7tr which requires massive debt servicing, which is about 40pc of the government’s revenue collection.

Independent economists and analysts have criticised the government’s borrowing strategy which they say has failed to induce economic growth.

During the last two years, the government added Rs3.526tr to the domestic debt, which was Rs19.914tr at the end of FY15.

It was also observed that due to massive borrowing from banks, the government has deprived the private sector of borrowing from banks. On the other hand, banks also find it safe to earn easy profits by investing in risk-free government papers.

Despite the fact that liquidity is being generated through borrowing, the development funds have to see a cut each year which hampered the economic growth.

Analysts and economists have indicated that the debt and interest repayments would rise by next year when the country’s repayment to the IMF increases.

Published in Dawn, August 30th, 2015

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