The country’s domestic debt servicing soared by 38 per cent in the first five months of this fiscal year, reflecting excessive borrowing by the government to bridge widening fiscal deficit, shows a latest report of the State Bank of Pakistan (SBP).The Monetary Policy Information Compendium for January issued on Friday revealed that both stocks of domestic debt and debt servicing increased during the July-November period of FY21.Domestic debt servicing rose by Rs255 billion to Rs921bn during July-November as against Rs666bn in the corresponding period last year.
Not only that, it also underlines the fact that the government is forced to borrow more money every year from domestic and foreign sources to pay its bills, including repayments on old loans, because it has utterly failed in its attempts to execute tax reforms in order to mobilise enough revenues. The hefty growth in public debt means that government expenditure on debt repayments will continue to rise quite substantially with the passage of time.
As a result, the government is unable to divert sufficient funds towards development, which adversely affects economic growth that is already sluggish due to the pandemic; over 50% of federal expenditure is debt servicing. Another more serious and immediate problem posed by this excessive debt burden is the use of FBR tax revenue to finance interest payments; over 73% of the FBR’s tax collection was eaten up by debt servicing. It is quite a vicious fiscal spiral that the government is stuck in as it struggles to positively influence macroeconomic variables by efficiently and effectively managing its revenue and expenditure.
For decades, multiple civilian governments and military setups did not make any meaningful attempts to reform the FBR. One had hoped that the PTI, with its promise of change and rebuilding institutions would have fared relatively better but it has not panned out quite that way. Strict but necessary measures taken to expand the tax net were reversed on the first sign of protest from lobbies that would take a financial hit as a result.
A new chairman was brought in from the private sector with the expectation that he would bring about a cultural change within the FBR, but instead he developed health problems, reportedly a nervous breakdown due to the targets he was given, and quit the job within eight months. The government can cut down on its expenditures all it wants but the fixed cost of debt servicing will remain as the country cannot default on its domestic debt obligations. Increasing its revenue is therefore the only way out of this debt trap.
Shafaqna Pakistan
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