KARACHI: The federal government’s budgetary borrowing for the fiscal year 2021-22 (FY22) was more than 85pc higher than the previous year, while the private sector borrowing from banks jumped by 142pc.

The latest data from the State Bank of Pakistan shows that the government’s budgetary borrowing exceeded by Rs1226 billion, or 85.4pc, to Rs2661bn during the fiscal year FY22 (up to June 24).

The large increase in budgetary borrowing reflects the fiscal deficit. The new Minister for Finance, Miftah Ismail, said in the first week of June that the fiscal deficit for FY22 would be 8 to 9pc of GDP. However, he said Pakistan would reduce its budget deficit to 5pc in FY23.

The role of the fiscal deficit in economic growth has been crucial. The fiscal deficit impedes economic growth by putting pressure on interest rates on the back of increased government borrowing, which crowds out private investment.

Govt’s budgetary borrowing jumps by 85pc in FY22

However, the situation in FY22 was different, as private sector borrowing also reached new highs, while the economy expanded by 6pc.The previous government came under serious criticism over heavy borrowing from domestic banks and external borrowing.

The talks with the IMF remained focused on the consolidation of the economy, which immediately resulted in the withdrawal of subsidies being provided on petroleum products and electricity by the previous government. The withdrawal of subsidies resulted in a sharp increase in the fuel prices, which escalated the inflation and made the rupee cheaper. It means more borrowing would be needed to meet the fiscal gap in FY23.

However, the private sector also accelerated its efforts to maximise its borrowing from the banks. The conventional banks went much beyond their previous lending history as they extended loans to the private sector that amounted to Rs850.6 billion in FY22, compared to Rs270bn in FY21; almost three times higher than the previous year.

The borrowing was done despite the high interest rate, which generally carries a risk of default. The conventional banks made record profits in the calendar year 2021, a sign of good economic growth and low risk.

The Islamic banks also increased their lending to the private sector by Rs100bn during the fiscal FY22, indicating the growing confidence of the Islamic banks, while it also showed the increasing share of Islamic banking in the existing banking industry.

The Islamic banking branches of conventional banks were more aggressive as their lending to the private sector almost doubled during the same period.

The total lending by these Islamic branches during FY22 was Rs353.3bn, as against Rs184bn in the same period of last year.

However, some bankers stated that the last quarter of fiscal FY22 saw lower growth in lending to the private sector, owing to higher interest rates.

The SBP increased the interest rate to 13.75pc, which is very high for the banks, which will have to extend loans at higher rates to cover the risks.

The finance minister has already announced that inflation would be higher in FY23 than experts believe it could be in the range of 19 to 22pc. It indicates that the interest rate, which is to be announced on July 7, would be increased to come closer to inflation. A low interest rate with higher inflation means a negative real interest rate. The depositors would get devalued profits in FY23.

Published in Dawn, July 7th, 2022