Islamabad’s debt relief: A temporary triumph amid fiscal uncertainty
Islamabad has managed to repay Rs2.03 trillion in the first half of the ongoing fiscal year as compared to borrowing a staggering Rs2.875 trillion in the same period of fiscal year (FY) 2023-24, the State Bank of Pakistan (SBP) has revealed.
As per the details, the federal government’s borrowings from financial institutions remained negative for the first two quarters of FY2024-25 as Islamabad was able to retire its debt liabilities owing to the record-breaking inflows the SBP was able to generate in the pervious year.
The SBP was able to generate a whopping Rs3.4 trillion in profit, as a result of stable value of the rupee in the past year along with sky-high interest rates at 22 percent.
The SBP transferred 80 percent of its profits to Islamabad, which amounted to Rs2.72 trillion. However, it might not be possible for the SBP to sustain such a high level of profitability as interest rates have been slashed to just 13 percent now.
Experts, however, predict a fall in the liquidity of the national exchequer in the upcoming half of ongoing fiscal year, which could force Islamabad to borrow funds to finance the budget. The drop in liquidity is primarily due to the fact that SBP profits are projected to fall.
According to reports, the SBP has been the government’s biggest profit-earner, surpassing any potential earnings from trade or industry. This means that cash inflows to the federal government might fall drastically in case of a drop in SBP profits.
This fall in inflows might be exacerbated by a projected fall in Treasury bill (T-bill) yields causing further liquidity issues for the government in the upcoming half.
While the retirement of debt in the first half of the fiscal year is a success, the same is being seen as temporary due to projected decline in inflows, which could prompt Islamabad to resort back to its historical trend of borrowing money for budgetary support.
As of now, the Federal Board of Revenue (FBR) has consistently missed its collection targets in the first five months of FY2024-25. Since the FBR has been unable to generate the revenues necessary to sustain budget outlays for the second half.
While current situation suggests that Islamabad will resort to utilising borrowed funds to plug the gap in the budget, speculations regarding the government’s future course of action are on the rise after achieving this short-term victory.
Officials from the International Monetary Fund (IMF) are especially interested in the unveiling of said plans given how Islamabad is not delivering on all of the agreed upon terms for the $7 billion loan that it secured earlier this year.