KARACHI: The central government debt surged by Rs8.07 trillion, or 13 per cent, during the previous fiscal year, bringing the total to Rs68.9tr by the end of June 2024, according to data released by the State Bank of Pakistan (SBP) on Thursday.

The debt stock rose by 1.7pc in just one month, as it stood at Rs67.73tr by the end of May.

The sharp rise in debt has exacerbated financial challenges for both the government and the public. The government now faces increasing difficulties in servicing its debt and funding development projects while citizens bear the burden of new taxes.

Despite the mounting debt, the government has been unable to reduce its spending, which might have provided some relief to the public and allowed for development expenditures. The budget allocation for the Public Sector Development Programme (PSDP) has been repeatedly slashed to accommodate rising spending, contributing to economic contraction in FY23 and a modest growth rate of 2.4pc in FY24.

Overall indicators improve; debt-to-GDP ratio slumps to six-year low at 70pc

Much of the government spending has been financed through additional borrowing, with the government paying Rs8.3tr in debt servicing during FY24 alone.

For the current fiscal year, the government has earmarked Rs9.78tr for debt servicing, which accounts for more than half of the total budget outlay of Rs18.9tr.

Data indicates that the federal government’s domestic debt increased substantially by Rs8.35tr, rising from Rs38.81tr in June 2023 to Rs47.16tr by the end of June 2024.

Pakistan Investment Bonds (PIBs) dominated the domestic debt, increasing by Rs6tr to reach Rs28tr over the year. Market Treasury Bills, which attracted about $444 million in foreign investment during FY24, contributed to a rise in total debt to Rs10.25tr by June 2024, up from Rs9.33tr in June 2023.

Foreign debt servicing

The country’s foreign debt servicing decreased in FY24 compared to the previous year, primarily due to the rollover of repayments. According to SBP data, the country paid $16.94 billion in debt servicing during FY24, down from $20.82bn in FY23 — a reduction of $3.89bn.

Of the total debt servicing payments made in FY24, $5.46bn was for interest, while $11.48bn covered the principal amount. The rollover of debts resulted in lower interest and principal payments compared to FY23. Specifically, the payment of principal fell by $4.92bn, and interest payments decreased by $1.03bn year-over-year.

Indicators improve

Meanwhile, a report from Topline Securities suggested that Pakistan’s debt indicators have significantly improved in the fiscal year 2024, with both the overall debt-to-GDP ratio and the external Debt-to-GDP ratio reaching six-year lows.

The country’s debt-to-GDP ratio fell to 70pc in FY24, which is attributed to the fact that the country’s nominal GDP has grown at a faster pace than its debt, driven largely by higher inflation rates.

Similarly, the external debt-to-GDP ratio also declined to 26pc in FY24 from 32pc in FY23 due to a relatively smaller increase in foreign currency borrowings compared to the rise in local currency debt.

Further positive developments were seen in the ratio of external debt servicing to total exports, which fell sharply to 35pc in FY24 from 51pc in the previous fiscal year. This ratio indicates how much a country’s export revenue will be used up in servicing its debt, thus how vulnerable the payment of debt service obligations is to an unexpected fall in export proceeds.

Published in Dawn, August 16th, 2024