Government borrows Rs1.21tr from banks to bridge fiscal gap

The government has been borrowing extensively from the banking system to bridge the widening fiscal gap. The State Bank of Pakistan (SBP) data showed that the federal government borrowed Rs1,213 billion from the banks during the first five months of FY23 against the net debt retirement of Rs38.7bn during July-Nov FY22. The key issue in the talks with IMF is the widening of the fiscal gap as it rose to 1 per cent of GDP in the first quarter compared to 0.7pc in the same period last year. The fiscal deficit target for FY23 has been projected at 4.9pc but increased borrowings indicate it could not be achieved and the over-reliance on banks’ money may hamper the government’s economic plans. The current pace of borrowings suggests the government may set a new record. During the first quarter of FY23, the government met the 96pc fiscal deficit through borrowings from domestic banks. This may further increase since the interest has been raised to 16pc from 15pc. The cost of borrowing will surely increase and the debt repayments would be higher. Ultimately, the government will use its maximum revenue for domestic debt servicing and reduce the investment in development projects. It also indicates that the government’s plan to borrow from abroad to improve its revenue resources has not worked so far.