KARACHI: After retiring Rs1.5 trillion in debt during the first half of the current fiscal year (FY25), the government has significantly increased its borrowing from commercial banks, reaching Rs2.7tr by early May.

From July to the end of December FY25, the government retired Rs1.541tr from commercial banks, reflecting a cautious approach to keep the fiscal gap within the IMF’s prescribed range in order to continue receiving further assistance from the donor agency.

This debt retirement contrasted sharply with the previous year’s trend, when the government recorded a net borrowing of Rs3.744tr during the same period. The retirement marked a new trend, as the government had been a consistent net borrower for many years.

One of the major reasons for the debt retirement in the first half was the additional supply of massive liquidity — amounting to Rs2.7tr — from the State Bank as profits.

This substantial liquidity helped economic managers reduce short-term domestic debt, and they were successful in this strategy.

Rs1.5tr debt retired in first half of FY25

However, the second half of the fiscal year saw a sharp increase in liquidity demand, leading the government to resume large-scale borrowing. According to the latest SBP data, total borrowing stood at Rs2.690tr from July 1 to May 9 (FY25) — still far below the Rs6.076tr borrowed during the same period of the last fiscal year.

“Pakistan’s fiscal deficit is projected to decline to 5.4-5.5 per cent of GDP in FY25, down from 6.8pc in FY24 — the lowest in nine years,” said Mohammad Sohail, CEO of Topline Securities.

The borrowing in FY24 was particularly costly, as the interest rate remained at 22pc, which not only damaged the economy but also burdened the government with expensive debt.

In the FY25 budget, the government allocated Rs9.775tr for interest payments — almost half of the total budget outlay of Rs18.87tr.

Sources in the financial sector said the government would require additional funds from banks, particularly following recent Indian aggression against Pakistan. Top government officials have indicated that the upcoming budget — now postponed by a week to June 10 — will include an increase in defence spending. This will inevitably require either increased revenues or risk creating a larger fiscal gap.

The overall fiscal deficit for FY25 was set at Rs7.283tr. However, this gap may widen due to increased spending, and the next fiscal year could witness an even larger deficit.

Bankers believe the government will rely heavily on commercial banks in FY26 due to a growing revenue shortfall. They note that there is little chance of achieving higher economic growth and revenue collection within the year.

Due to poor economic growth — which has worsened joblessness and rising poverty — the government was forced to revise customs duty from 19pc to 9.5pc. While this will reduce revenue from customs, the move aims to lower the import cost of raw materials and stimulate the economy.

The government also revised its GDP growth projection for FY25, now estimating 2.68pc growth — significantly below the original target of 3.6pc.

According to provisional estimates approved by the National Accounts Committee, Pakistan’s economy is expected to grow at a rate of 2.6pc in the current fiscal year.

Published in Dawn, May 25th, 2025