Pakistan's debt servicing heads towards record PKR 8 trn as rate hike looms

Pakistan's entire debt servicing is on track to reach a historic high of Pakistan Rupee (PKR) 8 trillion, with the prospect of a minor increase in the policy rate in the region of 1 per cent against the anticipated allocation of PKR 7.3 trillion for the current fiscal year, The News International reported.

The fiscal year 2023-24 will mark the first time when practically every month of the current fiscal year, federal revenue receipts will be less than what is needed to pay for servicing domestic and international debt. Since the fiscal position will only become worse, there will be more serious risks, so the Ministry of Finance genuinely wants the policy rate to stay at 22 per cent or less.

The News International reported citing top official sources that in the last auction of generating through T-bills (Treasury-bills) and PIBs (Pakistan Investment Bond), the government has raised PKR 1.4 trillion at a mark-up rate of slightly above 23 per cent on weighted average so the stage was set to witness a little spike in the policy rate in the ensuing monetary policy committee (MPC) scheduled to meet on September 14.

The government has repaid PKR 2 trillion upon the maturity of outstanding domestic debt.

"Now we are making efforts for staggering of our debt market whereby efforts will be made to shift the debt from short term to long term," said official sources quoted by The News International but a few independent economists argued that the re-profiling of domestic debt could only be done where there would be reduced interest rate environment achieved after receding of inflationary pressures.

"In the wake of recent developments whereby strict administrative measures against smuggling of dollars have paved the way for improving the exchange rate as the rupee in interbank and open market strengthened against the dollar. It has resulted in evaporating the possibility of hiking the policy rate by 2 per cent in the MPC meeting," said official sources.

The policy rate is now anticipated to increase by a maximum of 1.25 per cent, while it may be preferable to remain steady in order to indicate support for the investment climate. However, since the rates on T-bills and PIBs have already increased, the cost of debt servicing would go up even more and could surpass PKR 8 trillion for the current fiscal year.

However, the revenue of the federal government would be on the lesser side. The Centre will have resources totalling PKR 4 trillion after allocating resources to the provinces under the NFC Award and the FBR, assuming that the latter meets its yearly tax collection target of PKR 9.4 trillion without any slippages.

The federal government's net revenue receipts could reach PKR 7 trillion with the non-tax collection objective of PKR 2.9 trillion. In order to meet the demand of PKR 1 trillion for debt servicing, which would entail additional borrowing from the government, the sole head of spending for debt servicing would now be increasing to PKR 8 trillion, The News International reported.