WEDNESDAY DECEMBER 26: Domestic debt servicing reaches 60 percent of tax revenue

KARACHI: Domestic debt servicing has reached some 60 percent of total tax revenue in the first quarter of current fiscal year 2012-13 (FY13) is mainly due to rising and costly government borrowings. Sources in the Ministry of Finance told Business Recorder that the higher borrowing from domestic banking system for budgetary support has added to the burden of debt servicing on the federal government.
The pace of debt servicing has registered a healthy growth during the initial months of current fiscal year, mainly due to costly borrowing from domestic banking system followed by tight monetary policy. The federal government spent some Rs 269.1 billion on account of domestic debt servicing during July-September of FY13 which is some 59.6 percent of the total tax revenue collection amounting to Rs 451 billion during the same period.
As a percent of total revenue, domestic debt servicing in first quarter of FY13 is also some 39 percent of total revenue collected in July-September of FY13. As against Rs 269.1 billion debt servicing, total revenue, which is the collection of total tax and non-tax revenues by the government, stood at Rs 692 billion during the first quarter of current fiscal year. In addition, domestic debt servicing is also some 27.6 percent of total expenditure occurred during the period under review.
The domestic debt stocks have already reached new historical level of Rs 8.12 trillion by end of September 2012 from Rs 7.63 trillion in June this year, depicting an increase of Rs 482 billion in first quarter of current fiscal year. Economists said in the absence of external financing, excessive reliance on costlier domestic resources for financing of fiscal imbalances has increased the country's debt servicing burden.
After a long gap, the country had received an amount of $1.118 billion from US on account of Coalition Support Fund (CSF) after a formal agreement for Nato supplies. This will help reduce borrowing from domestic sources, they said. In addition, another amount of over $600 million of CSF is likely to be released in a few weeks, which also provides some cushion to reduce borrowing from domestic sources, they added.
Economists expressed concern over rising debt servicing, saying high payments on account of debt servicing can complicate debt management for the government, resulting in further borrowing from domestic banking system. They said the government is already facing a shortfall in revenue collection during the current fiscal year and in this situation, the government may face difficulties in debt payments.
However, they hoped that after the reduction in Discount Rate (DR) by the State Bank of Pakistan, it is expected that domestic debt payments will reduce in coming days. In mid of December, SBP once again eased monetary policy by slashing the interest rate by 50bps, bring it down to 10 percent. This is the second downward revision in key policy rate during the current fiscal year.
On cumulative basis, discount rate has come down by 200bps from 12 percent to 10 percent in fiscal year 2012-13 and after a span of 5 years the DR is again at the level of 10 percent. "This will also support the government, which is the key borrower of domestic banking industry, to reduce its debt payments," they added. The Federal Board of Revenue faced a shortfall of some Rs 53 billion during the July-October FY13, as it collected Rs 546.2 billion against the target of Rs 599.3 billion during this period.