ISLAMABAD   -   The government’s record borrowing has spurred a debt servicing crisis, stifling the country’s growth prospects and raising alarm among economic experts. Data from the State Bank of Pakistan (SBP) shows that the government borrowed an unprecedented Rs7.39 trillion from July 2023 to June 7, 2024, surpassing the combined borrowing of the previous two fiscal years.

This massive debt accumulation comes despite the interest rate remaining at an exceptionally high 22% for nearly a year, indicating that the debt servicing costs will soar, significantly exceeding the budget estimates for the upcoming fiscal year. The borrowing spree reflects the government’s high spending needs, even as the development budget was slashed to meet other expenses in the outgoing fiscal year. The budget document for FY2023-24 indicates that Rs7.21 trillion was allocated for domestic debt servicing and Rs1.04 trillion for foreign debt servicing, bringing the total to Rs8.25 trillion. For the upcoming FY25, the government has allocated Rs8.736 trillion for domestic debt servicing and Rs1.04 trillion for foreign debt servicing, totaling Rs9.77 trillion.

Economists and financial analysts are deeply concerned about the implications of this borrowing trend. Dr. Ahmed Faraz, a senior economist, has warned that the government’s excessive reliance on borrowing could severely narrow its fiscal space.

“The government is now spending almost its entire tax revenue on interest rate payments, leaving little room for development projects and essential public services. This is not sustainable in the long term and poses a significant risk to economic stability,” he said.

Moreover, the government’s level of borrowing is affecting the private sector, which is finding it increasingly difficult to access credit. “The banks are investing heavily in government securities due to their risk-free nature and attractive returns, but this comes at the expense of the private sector. The businesses are struggling to secure affordable financing, which hampers their growth and innovation,” explained Ali Raza, a senior banking analyst.

The recent auction of Pakistan Investment Bonds (PIBs) further underscores this trend. The government raised Rs131.4 billion through the auction, with the highest amount of Rs115 billion coming from three-year PIBs at a 16.6% rate of return. This adds to the already significant domestic debt volume, which has reached Rs26.53 trillion as of April 2024. Ali pointed out the long-term risks associated with this borrowing pattern.

“While short-term fiscal needs are being met, the long-term economic consequences are dire. High debt servicing costs limit the government’s ability to invest in infrastructure, education, and healthcare, which are critical for sustainable economic growth. This could lead to a vicious cycle of borrowing and debt accumulation,” he remarked. “The government’s fiscal policies must balance the need for immediate funding with the imperative of maintaining economic stability. Persistent high inflation and interest rates could undermine any potential recovery,” he added.