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July interest payments surpass govt income

maithil

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Exceed income by Rs156b, sparking concerns of debt sustainability

Interest payments in July increased alarmingly to Rs537 billion, surpassing the federal government’s net income for the month by Rs156 billion. This has raised concerns that the annual debt servicing cost may exceed budget allocations due to rising interest rates
.

Provisional federal fiscal operations for July, marking the beginning of fiscal year 2023-24, have indicated that Pakistan’s debt situation is no longer sustainable. The country is now borrowing primarily to meet interest payments, which is contributing to an elevated debt burden.

Government officials reported that in July, the federal government paid Rs537 billion in interest payments, while its net income stood at a mere Rs381 billion, falling short of interest payment needs by 41%. Just a year ago, the net income was sufficient to cover interest payments, but that scenario has changed.

Another worrisome indicator is that the Rs537 billion interest payments equalled the tax collection by the Federal Board of Revenue (FBR) in July.

This revelation coincided with skyrocketing interest rates, forcing the federal government to borrow at historically high rates, including a rate of up to 24.5% on Wednesday for a three-month period.

The federal government borrowed Rs1.3 trillion at a rate of 24.5% for three months, which was 2.5% higher than the key policy rate. However, debt managers argued that a majority of the Rs1.3 trillion was borrowed at a 23.25% rate. The government raised Rs926 billion at 23.25% interest rate resulting in an average borrowing cost of 23.39%.

Market sentiment appeared reluctant to lend money to the government due to reports that the central bank was considering increasing the key policy rate to 25%, although the State Bank of Pakistan (SBP) denied these reports. The SBP-dominated Monetary Policy Committee is scheduled to meet on September 14, with analysts expecting further tightening of monetary policy due to rising inflationary pressures.

The federal government had no choice but to secure these costly loans due to its cash buffers being nearly Rs1.5 trillion less than emergent needs. Against almost Rs1.2 trillion in cash buffers, the government was scheduled to make Rs2.05 trillion in debt repayments.

Similarly, Rs310 billion in interest payments were due within this week, including on external loans, said sources. Additionally, around Rs80 billion was due to the Benazir Income Support Programme (BISP) beneficiaries.

For the current fiscal year, the federal government has allocated Rs7.3 trillion for debt servicing, with some officials in the Ministry of Finance suggesting that the cost may exceed Rs8 trillion.

In the previous fiscal year, the federal government missed its budget targets and failed to restrict fiscal operations to the level agreed upon with the International Monetary Fund (IMF) in February. The last year witnessed actions taken by the coalition government that were entirely out of line with prudent fiscal management, leading to a substantial increase in public debt from Rs44 trillion in March 2022 to Rs61.8 trillion by July this year.

In July, the federal government’s total expenditures surged by 20% compared to the same month the previous year, reaching Rs645 billion.

The federal government resorted to borrowing for all its activities, even including defence expenditures. However, in a questionable move, the government recently assumed responsibility for a $1.8 billion polio eradication programme this week. Development spending also witnessed significant growth, rising to Rs16 billion from Rs5 billion the previous year.

Under the IMF programme, Pakistan is committed to generating a primary budget surplus. Provincial governments contributed a surplus of only Rs39 billion, compared to Rs97 billion the previous year. Tax collection by the FBR remained stable at Rs538 billion, against Rs437 billion last July.

Non-tax revenues witnessed a substantial increase, totalling Rs139 billion compared to Rs41 billion the previous year, primarily due to petroleum levy collection. Gross federal revenue receipts amounted to Rs678 billion, an increase of Rs200 billion from the previous year. However, the federal government’s total net income, after transferring provincial shares, stood at just Rs381 billion, not enough to finance interest payments.


Gap will widen when interest rate is increased to 25%. Looks like a spiral.

Take more debt to payback interest. But as you keep on taking on more debt, your interest rate also needs to keep increasing.
 
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Instead of policy rate of 25%, they can try Quantitative Easing (i.e., SBP buys GOP bonds). That will increase money supply and push down interest rates.
 
Instead of policy rate of 25%, they can try Quantitative Easing (i.e., SBP buys GOP bonds). That will increase money supply and push down interest rates.
How will it help? They are already doing it. It'll bring so much inflation in to that economy, it'll effectively kill the poor.
 
How will it help? They are already doing it. It'll bring so much inflation in to that economy, it'll effectively kill the poor.
Public debt is unsustainable now, just accumulating debt to infinity serves no purpose. If policy rate is 25%, effective inflation may be 50%. If they monetize the debt, they don't have to borrow as much and lower the policy rate. inflation will remain about the same, may be in the 50% - 75% range. But they can reduce government borrowing. Also, all debts, public and private, will become less burdensome as you are paying back with depreciated money. Poor are getting killed now. Poor will get killed with QE, but the government will be unburdening the debts and indirectly taxing those who have cash but are reluctant to pay tax (most of the Pakistani rich don't pay taxes). Inflation is a tax on those who have hoarded cash.
 
Public debt is unsustainable now, just accumulating debt to infinity serves no purpose. If policy rate is 25%, effective inflation may be 50%. If they monetize the debt, they don't have to borrow as much and lower the policy rate. inflation will remain about the same, may be in the 50% - 75% range. But they can reduce government borrowing. Also, all debts, public and private, will become less burdensome as you are paying back with depreciated money. Poor are getting killed now. Poor will get killed with QE, but the government will be unburdening the debts and indirectly taxing those who have cash but are reluctant to pay tax (most of the Pakistani rich don't pay taxes). Inflation is a tax on those who have hoarded cash.
Inflation will devalue their currency further against dollar. How will they ask their poor to pay 1 lakh rupees a month (no matter how much devalue the currency) on power since the agreement rate for power is in dollars. Not to mention their external debts, they would get way expensive to be paid. No one will invest in the country that constantly runs high inflation. They wouldn't risk their investment to be devalued.
 
Inflation will devalue their currency further against dollar. How will they ask their poor to pay 1 lakh rupees a month (no matter how much devalue the currency) on power since the agreement rate for power is in dollars. Not to mention their external debts, they would get way expensive to be paid. No one will invest in the country that constantly runs high inflation. They wouldn't risk their investment to be devalued.
There is no solution to their problems in the current setup. I was only suggesting inflation in lieu of infinite debt. The poor can't pay electric bills already. It makes no difference if the bill doubles. A bill of 1 million or 2 million is same for a person who has only 100,000. Investment decisions are done on profitability. Inflation is a big disincentive, but the current regime vacuums all savings into public debt leaving virtually nothing for private capital formation.
 
There is no solution to their problems in the current setup. I was only suggesting inflation in lieu of infinite debt. The poor can't pay electric bills already. It makes no difference if the bill doubles. A bill of 1 million or 2 million is same for a person who has only 100,000. Investment decisions are done on profitability. Inflation is a big disincentive, but the current regime vacuums all savings into public debt leaving virtually nothing for private capital formation.
We already have examples of Argentina and Turkey. It doesn't help. Pakistan doesn't have a narcissist leader like Erdogan who can keep the country together. Civil war is inevitable with this method. The rich won't just take it lying down, each and every dollar will be sucked out of the country to save whatever little they have left in their pockets.
 
Instead of policy rate of 25%, they can try Quantitative Easing (i.e., SBP buys GOP bonds). That will increase money supply and push down interest rates.

SBP is barred from buying government bonds. That's why every other month they have to auction T-bills for running government.
 
SBP is barred from buying government bonds. That's why every other month they have to auction T-bills for running government.
Barred by whom? So, they will run up debt instead of monetizing the debt. What will happen when no one wants to buy their T-bills? What if there is simply no liquidity in the private sector to buy T-bills at any discount rate? GOP wants a trillion rupees to run the military for next 6 months and there isn't a trillion rupees with anyone.

We already have examples of Argentina and Turkey. It doesn't help. Pakistan doesn't have a narcissist leader like Erdogan who can keep the country together. Civil war is inevitable with this method. The rich won't just take it lying down, each and every dollar will be sucked out of the country to save whatever little they have left in their pockets.
There won't be any civil war as there are no two (or more) factions capable of waging a war against the state i.e., the military. Most likely scenario will be similar to Lebanon, Myanmar and may be some low-level agitation like in Sri Lanka. Low grade lawlessness like in 2022, but no 'war'.
 
Barred by whom? So, they will run up debt instead of monetizing the debt. What will happen when no one wants to buy their T-bills? What if there is simply no liquidity in the private sector to buy T-bills at any discount rate? GOP wants a trillion rupees to run the military for next 6 months and there isn't a trillion rupees.
They have done so under IMF pressure. Now commercial banks are being used for the same purpose, pushing discount rate higher.
 
There is no solution to their problems in the current setup. I was only suggesting inflation in lieu of infinite debt. The poor can't pay electric bills already. It makes no difference if the bill doubles. A bill of 1 million or 2 million is same for a person who has only 100,000. Investment decisions are done on profitability. Inflation is a big disincentive, but the current regime vacuums all savings into public debt leaving virtually nothing for private capital formation.
It was never about the poor people, PMLN & Estb bought that knowing fully well what will happen.

Countries like Pakistan , India can invest alot less in solar and would get the best results just because of geo location, Pakistan coule have invested in hyrdo source with little extra investment could have looked at future and also could have build Pakistan water storage, atleast some work on the water shortage.
Heck even wind mills could have worked.

Why Pakistan has actively worked so people dont invest in own solar building capacity.

These projects were not started in 80s 90s.
These are late 2010 projects , close to cepc time. why no one is checking why and whom did invest in these , how much cutbacks were given, what kind of feasibility studies were done.

Simple this a cycle so they come back every 5 to 10 years to loot again
 
It was never about the poor people, PMLN & Estb bought that knowing fully well what will happen.

Countries like Pakistan , India can invest alot less in solar and would get the best results just because of geo location, Pakistan coule have invested in hyrdo source with little extra investment could have looked at future and also could have build Pakistan water storage, atleast some work on the water shortage.
Heck even wind mills could have worked.

Why Pakistan has actively worked so people dont invest in own solar building capacity.

These projects were not started in 80s 90s.
These are late 2010 projects , close to cepc time. why no one is checking why and whom did invest in these , how much cutbacks were given, what kind of feasibility studies were done.

Simple this a cycle so they come back every 5 to 10 years to loot again
Have you seen the level of efficiency with which sepoys are going after PTI, they've rendered the constitution and Supreme Court irrelevant, whereas the same bharrway were making excuses of how their hands were tied behind their back by the judiciary when dealing/fighting terrorism. Or how easily the same courts gave relief after relief to the biggest looters of PDM but were helpless in opening at midnight when it suited the sepys. This 5/10 year cycle of loot is BS, loot is constant and ubiquitous top to bottom, the biggest facilitators, purveyors and beneficiaries of loot are the sepoys.
 
Have you seen the level of efficiency with which sepoys are going after PTI, they've rendered the constitution and Supreme Court irrelevant, whereas the same bharrway were making excuses of how their hands were tied behind their back by the judiciary when dealing/fighting terrorism. Or how easily the same courts gave relief after relief to the biggest looters of PDM but were helpless in opening at midnight when it suited the sepys. This 5/10 year cycle of loot is BS, loot is constant and ubiquitous top to bottom, the biggest facilitators, purveyors and beneficiaries of loot are the sepoys.
By 5 to 10 year cycle i mean following
1 Military keeps looking looting no matter who is in Power.
PMLN & PPP would take turns to loot in the name of these projects.
Bureaucracy would he used to same they can put loyal dogs in positions which can latter be used to exert influence
 

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