EDITORIAL: It’s quite shocking that the government’s borrowing in the first 11 months of the outgoing fiscal year has already exceeded its combined borrowing over the previous two years. And to add insult to injury, this was done when the interest rate was at the historic high of 22 percent, indicating how much the ‘size’ of debt servicing is going to increase.
This fact alone goes to show that the government spends all its meagre tax revenue on debt servicing while continuing to borrow more, at exorbitant rates, from local banks.
Let’s not forget that the Rs7.39 trillion borrowed between July 2023 and 7 June 2024 does not account for the last month of the fiscal. And banks, which were only too happy to lend this money, reportedly expect the final figure to cross the Rs8trn mark. Imagine where all this leaves the private sector and the real economy.
In addition to incurring damaging debt through irresponsible borrowing, the government’s penchant for tapping private banks also plays out the textbook crowding out effect. The private sector has been begging for a substantial rate cut all year, complaining that they are priced out of the competitive international market and struggle to so much as break-even locally because of the toxic combination of inflated utility bills and the exceptionally high cost of credit.
Whether or not the interest rate continues easing, or by how much, once the new IMF programme’s “upfront conditions” begin to stoke cost-push inflation is an argument for another time. But what about the time the regime will stay dovish? Will the government get out of the private sector’s way or will it continue to crowd it out and effectively sabotage the delicate recovery?
Even worse, this borrowing trend shows how the economy is now locked in a downward spiral. It must keep borrowing to pay back debt and interest, even if it means choking a private sector that is already struggling to stay on its feet. Clearly, years of delaying necessary reforms and always relying on more aid to stay solvent is now showing on the balance sheet with a vengeance.
This is the economy’s inevitable implosion at play. Perhaps there’s a faint hope that sticking to IMF’s reform process would turn the economy around in the long run, but the government has itself made that prospect more remote than it should have been by still not properly taxing the biggest, best-connected tax evading sectors of the economy.
Copyright Business Recorder, 2024
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