Costly borrowing

THE finance ministry blaming the hikes in State Bank policy interest rates for the rapid growth in public debt is a case of the pot calling the kettle black. A ministry official told a Senate panel the other day that a 1pc increase in borrowing costs adds a whopping Rs600bn to annual debt-servicing expenses. He maintained that the debt stock had surged by over Rs7tr since January 2022 due to the increase in the policy rate from 9.75pc to 22pc. That has, indeed, been the case as soaring debt-servicing costs keep forcing the government to borrow more. As a new World Bank report notes: “Higher policy rates are increasing government borrowing costs, driving higher financing needs. These financing needs are … being met through increased borrowing from the domestic banking system.” But the official modestly omitted to mention the contribution of the government’s profligate fiscal policies to the quicker growth of its debt stock over the last year and a half, ie, failure to contain its large wasteful expenditures and boost tax revenues by broadening the tax base. He also didn’t mention how the spike in government borrowing from domestic banks to finance an average fiscal deficit of over 7pc year after year has crowded out the private sector and fuelled price inflation. The higher interest rate is a major contributor to our debt woes. But it isn’t the original sin.