KARACHI: Two-thirds of the tax revenue collected in the first quarter of 2016-17 was used for debt servicing, leaving the government with less than 34 per cent of the total collection to run the country.

The Statistical Bulletin for December recently issued by the State Bank of Pakistan (SBP) said the country paid Rs414 billion in debt servicing during July-September.

The report showed the tax collection during the same quarter was Rs625bn. This means the government had to use 66pc of its entire tax collection for debt servicing in the first three months of the fiscal year.

Domestic interest payments dominated this expenditure with Rs392.7bn, which equals 94.8pc of the total interest payments of Rs414bn. Interest payments on foreign debt in the same quarter amounted to Rs21.6bn.

The tax-to-GDP ratio has been a critical issue for the government, which is trying hard to bring it in double digits. The government has received criticism for increasing taxes on the already taxed sectors of the economy instead of growing the tax base. The tax base in Pakistan is the lowest in the whole region, which supports the perception that tax evasion in the country is high.

Higher debt servicing has created a serious problem for the country because development expenditures face the axe to deal with revenue shortages. It also gives rise to fiscal deficit, forcing the government to borrow from the banking system.

Another report by the SBP shows the government has already set a new record of borrowing from the central bank. In the first five months of the current fiscal year, the government crossed the figure of Rs1 trillion, which indicates the increasing fiscal gap.

According to the SBP report, interest payments in 2015-16 amounted to Rs1,263bn while the tax collected during the same fiscal was Rs3,112bn. It shows debt servicing was 40.6pc of the tax revenue collected in 2015-16.

However, the first-quarter report of the current fiscal shows debt servicing was 66pc of the tax collected in the same three-month period, reflecting the alarming trend for the government that faces a low revenue collection, higher fiscal gap and low foreign inflows.

Experts believe domestic and foreign debt servicing will increase this year because the borrowing in the last four years was higher than preceding years. The government has accumulated record foreign exchange reserves of over $23bn. Most of these reserves were accumulated through borrowing. Domestic borrowing through banks and non-banks has crossed the figure of Rs8tr. This requires debt servicing that will ultimately hurt development projects and economic growth of the country.

Published in Dawn, December 22nd, 2016