The Pakistani government’s high dependence on domestic loans to finance its expenditures hinders the development of a balanced budget, Aliya Hashmi, former member of the monetary policy committee (MPC) of the State Bank, told WealthPK.
The government’s failure to attain a balanced budget, where revenues match expenditures, is regrettable. The root cause of the problem lies in excessive domestic borrowings, and resultant interest payments each year, she said.
According to the State Bank of Pakistan, the total domestic debt in FY22-23 rose to Rs35,076 billion from Rs31,085 billion in FY21-22.
Aliya said the government faces the burden of interest payments at the eng of each fiscal year while making the budget. Revenues always fall short of planned expenditures in the wake of allocating a substantial amount of revenue to the payments owed to the domestic banks.
“Owing to a shrunk space for a balanced budget, the government faces challenges to finance development and social sector projects, specifically those related to education and health,” she said.
Aliya attributed the heightened influence of debt servicing to limited fiscal capacity, which was caused by a narrow revenue base.
"Owing to the restricted taxpayer pool, the government is obligated to assign a substantial segment of its yearly budget to fulfil debt obligations," she said.
Mentioning the impact of the high policy rate, she said, "The existing policy rate, set at 22%, exerts an adverse effect on the budget. Sustaining such an elevated policy rate leads to a notable escalation in the total outlay for interest payments to domestic creditors".
She advised the government to keep the policy rate low in order to minimize the amount of domestic liabilities.
To cut reliance on the domestic debt, the government needs to mobilize its domestic resources, adopt the policy of fiscal prudence, and reduce non-development expenditures.
In conclusion, the attainment of a balanced budget becomes a formidable task in the presence of considerable domestic obligations. By curtailing domestic debt, the government can realize the goal of a balanced budget.