KARACHI: The tight monetary stance by the State Bank of Pakistan (SBP) resulted in a massive surge in the federal government’s interest expenses, which rose by 54 percent to Rs 5.5 trillion in the first nine months of this fiscal year (FY24).
According to the Economic Survey issued on Tuesday, the federal government’s interest expenses were recorded at Rs 5.517 trillion during July-March of the current fiscal year as against Rs 3.582 trillion in the same period last year (FY23), showing an increase of Rs 1.935 trillion.
The annual budgeted estimate for the interest expenses is Rs 7.302 trillion for FY24 and the sharp rise in current expenditures (Rs 12.33 trillion) is also primarily attributed to a massive 54 percent increase in mark-up payments.
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The federal government’s interest expenses on domestic and external debt during July-March of this fiscal year is near about the total mark-up expenses incurred during the last fiscal year (FY23). The government paid Rs 5.695 trillion on account of mark-up payment during the last fiscal year.
Interest expense on domestic debt was recorded at Rs 4.807 trillion, which is 55 percent higher as compared to interest expense on domestic debt in the same period of preceding year. The annual budget expenses for FY24 are Rs 6.43 trillion.
Economic Survey revealed that the main reasons for increase is due to high cost of borrowing on new domestic debt and resetting of existing floating rate debt at higher rates on back of higher policy rate.
As around 74 percent of domestic debt is on a floating rate, the government’s interest payment surged with the increase of the policy rate.
The Monetary Policy Committee of State Bank of Pakistan (SBP) started monetary tightening in Sep 2021 to contain the inflation. MPC increased the policy rate by 25 bps to 7.25 percent in September 2021 and gradually it rose to 22 percent in June 2023.
Moreover, some of the increases in debt servicing are attributed to the expiration of the Debt Servicing Suspension Initiative (DSSI), which resulted in the accumulation of both long and short-term debt servicing.
Survey said that during July-March FY 2024, since external financing remained within the medium-term debt risk targets of 40 percent, significant borrowing had to be raised from domestic debt capital markets. In this regard, during the period under review, more than 70 percent of domestic debt stock was comprised of floating rate instruments, and a higher policy rate of 22 percent during the year triggered a sharp rise in domestic debt servicing.
The federal government has made Rs 710 billion interest payment on external debt during the first nine months of this fiscal year as against the full year Rs 872 billion allocated for FY24.
Domestic debt was recorded at Rs 43.4 trillion, revealing an increase of Rs 4.6 trillion. Following section highlights the developments in various components of domestic debt during the first nine months of the current fiscal year.
External public debt was recorded at US$ 86.7 billion at end-March 2024, revealing an increase of around US$ 2.6 billion during the first nine months of the current fiscal year.
Copyright Business Recorder, 2024