ISLAMABAD: Pakistan’s debt servicing cost is rising by more than 64 per cent this year, massively outpacing the revenue growth of 30pc and bringing the spending on development to zilch.

In its Mid-Year Budget Review Report for FY2023-24, the ministry of finance (MoF) placed the blame for this grim situation on the record high interest rates put in place under the dictates of IMF.

“The main challenge was rising markup payments in the wake of a high policy rate environment,” it said, adding that the “interest expense stood at around Rs4.2 trillion” in first six months (July-Dec 2023) compared to Rs2.573tr for the same period a year ago, showing an increase of 65pc. The interest payments this year grew at much greater speed than estimated by the ministry of finance at Rs7.3tr — almost 58pc of budget estimates for the full year.

As a consequence, close to 80pc of local and international borrowing was consumed by interest payments, instead of flowing to productive sectors and areas having positive impact on public lives.

Finance ministry holds high interest rate responsible for situation; utilisation of uplift funds struggles at Rs158bn

“A major chunk of current expenditure was for meeting interest payments (65.3pc of total current expenditure) during the July-December period. Of the Rs4.22tr, Rs3.718tr was spent on account of domestic interest payments and Rs502bn on external interest payments.

No wonder then, the utilisation of development funds struggled at Rs158bn (just 16.6pc) in half of the year against its annual allocation of Rs950bn.

“Under the government’s fiscal commitment, 50pc of development budget should be disbursed to relevant agencies at the rate of 20pc in first quarter and 30pc in second quarter of the year.

The MOF’s mid-year report, however, revealed that development spending in six months could not even get close to its target 3-month target. The MoF said that 88pc of the interest payments went to domestic debt. The federal fiscal deficit increased to Rs2.697tr, or 2.5pc of GDP, this half year compared to 2.1pc of GDP, or Rs1.78tr, of the same period last year.

Provinces’ contribution

However, provinces contributed higher cash surplus this year at Rs289bn compared to Rs101bn last year. Still, the overall deficit remained stubborn at 2.3pc of GDP against 2pc last year.

The primary account — the revenues minus expenditure, except interest — remained surplus on the higher side at 1.7pc of GDP (Rs1.8tr) when compared to Rs890bn or 1.1pc of GDP.

The midyear review said that 77pc financing of federal fiscal deficit was arranged through domestic sources. During the July-Dec period, overall receipts improved by 63pc on the back of impressive increase in both tax (30pc) and non-tax (117pc) revenues.

In absolute terms, net revenue receipts reached Rs4.013tr as compared to Rs2.463tr in last fiscal year’s corresponding period.

The MoF claimed that it vigorously pursued austerity measures approved by the federal cabinet. Non-essential expenditures like import of durable goods and vehicles, and creation of new posts were kept under check. Strict scrutiny and vigilance on expenditures since the beginning of the current financial year helped better expenditure management thereby contributing to improved fiscal discipline.

Despite record interest payment, the government was successful in controlling other expenditures as evidenced by an overall primary surplus of Rs1.812tr, it reported.

Revenue jumps 30pc

During the July-Dec FY2023-24 period, the Federal Board of Revenue (FBR) collected Rs4.469tr, showing an increase of 30.3pc compared to last year’s Rs3.43tr.

The real windfall bonanza, however, came from non-tax revenues (NTR), particularly the central bank’s profit on account of high interest rates and petroleum levy.

The NTR collection remained well above targets, with 66.8pc of the annual target achieved in the first half, meaning a 117pc increase was witnessed compared to the corresponding period of last year.

Expenditure on running of civil government and defence spending was at 42pc of their respective budget allocation. The MoF said the government did not extend any supplementary grants during the half-year period and unforeseen requirements were addressed through re-appropriations and technical supplementary grants.

The ministry claimed that procedure for the release of uplift funds was simplified to expedite the development work.

Published in Dawn, May 27th, 2024