Within the first five months of this fiscal year, the federal government borrowed Rs3.43 trillion from commercial banks, latest data released by the State Bank of Pakistan (SBP) reveal. In the comparable period of the last fiscal year, this borrowing stood around Rs542 billion. This means the federal government’s borrowing from banks has so far increased more than six times.

Who cares if the private sector remains deprived of bank credit, crowded out by massive government borrowing? Between July 1 and December 1 of this year, the private sector retired about Rs44.5bn of bank credit on a net basis. In the corresponding period of the last year, the private sector had made net borrowings of about Rs86bn, according to the SBP.

A very small part of the federal government’s bank borrowing (only Rs421bn out of the total Rs3.43tr) was used to settle previous borrowing from the central bank. So where is the rest of the money being spent? You guessed it right: on domestic and external debt servicing, gradual settlement of the energy sector’s circular debt, defence and security, and pensions of government employees as well as financing the cost of lavish day-to-day running of the government. All these heads of expenses are expected to remain the same with no significant cuts in sight on a net basis.

So the federal government’s borrowing from banks will continue to remain elevated not only through this fiscal year but also in the next one.

In the absence of enough bank credit flowing towards businesses, the private sector will utilise its retained savings, frustrating the objective of a tight monetary policy

The first-ever auction of the government debt on the Pakistan Stock Exchange (PSX) earlier this month should be seen in this backdrop. If selling of government bonds on the bourse continues in the future, it will help the federal government reduce its reliance on commercial banks for borrowings and make some room for the private sector to borrow from banks.

But since the central bank has left its policy rate unchanged at 22pc in its December 12 meeting, the private sector may still wait for a while before making net borrowings from commercial banks.

In the absence of enough bank credit flowing towards the private sector, the private sector will be forced to utilise its retained savings for meeting its immediate financial requirements. That will frustrate the primary objective of pursuing a tight monetary policy for reining in inflation. That will also make it harder for general companies to invest in government debts offered for sale through the stock exchange, leaving the field open for financial institutions to further build up inventory of government debt securities. The situation is getting increasingly complex.

At the root of Pakistan’s fiscal problems and its major economic ills is an unsustainably large external debt. The caretaker government is making some efforts to address this issue and the civil-military–run Special Investment Facilitation Council (SIFC) is trying to attract huge foreign investment into the country.

Last week, Saudi Arabia’s oil giant Aramco signed initial agreements to acquire a 40pc equity stake in Gas and Oil Pakistan Ltd. This is just the beginning of the materialisation of several Saudi foreign investment plans in Pakistan’s energy sector. But volumes and the timing of inflows matter. Promised foreign investment from Saudi Arabia, Qatar and the United Arab Emirates in our energy, mining and IT sectors is expected to materialise at an accelerated pace — partly due to the rapidly changing geopolitical ground realities and partly because of the constitution of the SIFC. Still, it’s not clear how much of foreign investment from the Gulf nations will come in during the current fiscal year and in the next one — and to what extent that foreign investment will ease our balance-of-payments problems.

That is why the caretaker government is scrambling to correct some structural issues of our export sector as well. And one can hope that the incoming elected government after February 8 elections will continue export-sector reforms. But here again timing and effects of such reforms on net exports matter more than anything else. Pakistan’s merchandise export sector is structurally too weak to grow big and fast without increasing imports at the same time.

Exports’ growth in nominal terms without making a real difference in the trade deficit means nothing in the balance-of-payments context. What we need today is big and fast growth in exports with little and manageable growth in imports. Will that happen? Let’s see.

The easiest way to amass net foreign exchange has always been growth in remittances. So far during this fiscal year, remittances have shown a declining trend, down 10.3pc year-on-year in the first five months of 2023-24. Economic policy efforts and an improvement in the political situation are required for the reversal of this trend. But that’s not an easy task.

In the first five months of this fiscal year, the declining trend in remittances is evident from all four major destinations: Saudi Arabia, United Arab Emirates, United Kingdom and United States. Minimum earning ceilings on immigrants imposed in the United Kingdom (to become effective from this spring) means many Pakistanis may have no option but to come back to Pakistan. In the United States, the political environment and labour market conditions are not welcoming for the additional import of Pakistani labour. In Saudi Arabia and the United Arab Emirates where doors are open for the new Pakistani diaspora, an increasing cost of living means Pakistani workers may not be able to send additional foreign exchange back home.

Increasing remittances from there will not be easy in the future, more so if the ongoing Hamas-Israel war spreads across the Middle Eastern region.

Published in Dawn, The Business and Finance Weekly, December 18th, 2023