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Real Cost Of Our Country’s Foreign Debt Is Higher Than We Think

Do you believe the federal government spends Cost 52 rupees out of every 100 rupees it collects each year on debt servicing? Unfortunately, this is correct.

From July to September 2022, the federal government’s current expenses was Rs1.832 trillion. According to the quarterly budget review, Rs954 billion of this sum was spent on debt repayment, both domestic and international. Domestic debt servicing alone cost Rs835 billion, or over 45.6% of current federal expenditures. Foreign debt servicing contributed for the remaining Rs119 billion, or almost 6.5 percent of current expenses.

These results are alarming. Even more concerning is the fact that there is no evidence of a meaningful recovery in the remaining three quarters of the current fiscal year. Domestic debt servicing will rise as long as the government borrows from commercial banks at a high interest rate. If you check at any recent treasury bills or Pakistan Investment Bonds auction, you will notice that the trend of rising yields is still intact.

Foreign debt payments will cost more in rupees if the rupee continues to weaken against major world currencies, particularly the US dollar.

The State Bank of Pakistan (SBP) and the Ministry of Finance are working hard to prevent further depreciation of the Pakistani rupee. However, the optimistic news of rescue cash inflows from international financial institutions (IFIs), as well as Saudi Arabia and China, can only support the rupee temporarily.

Economic growth will be limited in the future by declining development costs, forcing more borrowing from domestic and foreign sources

Only when non-debt-creating forex inflows from exports, remittances, and foreign direct investment are substantial enough to have an impact on the local currency can it become sustainably strong.

Furthermore, the price at which money is currently borrowed from IFIs has an impact on future service of foreign debt. Consider the terms and formats of the $9 billion in planned Chinese FX support and the $4.2 billion in expected Saudi Arabian support.

The cost of servicing foreign debt will definitely rise during the fiscal year and beyond as a result of rising IFI and commercial loan financing expenses combined with overall Chinese and Saudi FX support. The most recent instance of higher-cost foreign debt is Pakistan’s proposal for a $500 million budget support loan from the Asian Infrastructure Investment Bank (AIIB). The terms of this loan were just approved by the government. According to credible media reports, the loan will have a rate of around 5%, which is higher than the rate on some foreign bank loans.

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Between July and September 2022, defense spending accounted for around Rs313 billion, or 17% of the federal government’s current expenses. This means that the service of domestic and international debt (52 percent) and defense spending accounted for 69 percent of total federal government spending (17 percent). What do you think will happen to the remaining 31% of the current budget? This was spent on government operations (5.6%), grants (5%), and government staff subsidies (9.3%). (10.9pc). It is vital to investigate one’s motivations for spending so much money on each of these topics. Doesn’t it?

To name a few critical questions, what impact did the PTI government’s pension adjustments have? Why did the reform movement’s leader, Dr. Ishrat Husain, not suggest reducing the size of the government bureaucracy?

Can Pakistan, a country with limited resources, afford to spend up to 5.6 percent of its current budget just to keep the government running? Why can’t the federal government embrace austerity across the board and reduce this tremendous cost by shrinking the cabinet, departments, and divisions?

Are subsidies adequately targeted to different groups of individuals and enterprises, and are they having the desired effects? If not, what actions are being taken to make subsidies more targeted and specialized?

What are the funds specified under “Grants to others (other than those covered by subsidies)” used for? And what results have they obtained thus far? Provinces and failing state-owned enterprises are typical receivers of federal “gifts” (SOEs).

The country has a right to know why financially dishonest and insolvent SOEs are still receiving “financing,” and whether this has resulted in any clearly beneficial consequences.

The coalition administration led by the PML-N had promised to speed up the privatization process, but the budget evaluation showed that from July to September, no money was made through privatization.

Why? When are we going to privatize our loss-making SOEs? What is causing the delays, and how can they be avoided?

Due to a severe financial position, only Rs219 billion was spent on development from July to September 2022, with the federal government contributing Rs67 billion and the provinces contributing the remaining Rs152 billion.

Compare the Rs219 billion spent on national development to the Rs835 billion spent just on domestic debt repayment. Simply put, our government spends only 219 rupees on development for every 1,054 rupees available to pay for domestic debt markups. After decades of financial mismanagement, where has Pakistan ended up? Is this even possible in the next ten years?

Development spending ensures future economic growth. If development expenses remain as low as they are presently for a few more years, the economy will suffer tremendously. Every year, falling development expenses put the nation’s economy in jeopardy, necessitating the formation of new domestic and international loans.

As a result, debt servicing will continue to consume the vast bulk of budgetary budgets, leaving less and less available for future growth and defense.

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