KARACHI: Despite a low interest rate, the government paid as much as Rs792 billion in servicing domestic debt in the first seven months of 2016-17 compared to Rs764bn in the corresponding period last year, a report by the State Bank of Pakistan (SBP) said on Friday.

The Monetary Policy Information Compendium for March revealed that the historically low interest rate did not bring the amount of debt servicing down. Instead, it increased compared to the preceding fiscal year, which reflects the scale of domestic borrowing by the government.

The volume of debt servicing in the seven months is too high and blunts the effort to bring down the fiscal deficit to 4.1 per cent.

The situation has become alarming as the government is already under pressure to clear circular debt amounting to Rs350bn and sales tax refunds to the tune of Rs300bn.

A recent report shows the revenue collection missed its target by Rs168bn in the first nine months of the current fiscal year.

The government is already under pressure to clear circular debt of over Rs350bn and sales tax refunds of Rs300bn

The finance minister said last week the revenue collection of Rs2,258bn in the first nine months of 2016-17 was an all-time high, although it missed the target of Rs2,426bn. The fiscal deficit is likely to shoot up if the government decides to clear all outstanding dues.

Debt servicing in the seven months equals 35pc of the nine-month revenue collection. It indicates that the full-year debt servicing will cost a lot more than a year ago and hinder development plans.

The finance minister recently said that the level of debt will be brought down from 62pc to 60pc of the gross domestic product. However, rising debt servicing requires more borrowing that will further increase the stock of debt.

Another report by the SBP shows that the government borrowed Rs913bn from the central bank during the first nine months of the current fiscal year. Its borrowing from private banks was Rs25bn.

The government has started retiring Pakistan Investment Bonds (PIBs), whose yields were in the double digits. Yet the stock of PIBs at the end of January was Rs4.1 trillion. The stock of high-yielding PIBs reduced to Rs4.1tr from Rs4.9tr between June 2016 and January.

The compendium noted that debt servicing was 3.7pc of GDP in 2015-16. It was 30.3pc of tax revenues in the same year. If domestic debt servicing continues at the same pace, the total amount can be around Rs1,350bn.

Published in Dawn, April 15th, 2017