Within three months and ten days of this fiscal year (between July 1 and November 10), the federal government borrowed more than Rs3.244 trillion from commercial banks. In the comparable period of the last fiscal year, the then federal government’s borrowings from banks totalled just Rs827 billion or one-fourth of where these borrowings stand today.

What is more disturbing is the fact that this quadrupling of the government’s borrowings from banks has occurred even though tax revenue generation in July-October exceeded the target of Rs2.68tr. Our fiscal sector is obviously under immense pressure. In the last fiscal year ending in June, the federal government’s borrowings from banks stood at Rs3.72tr, up from Rs3.45tr a year earlier.

Government borrowings from banks continue to soar despite enough tax collection primarily because of the ever-increasing cost of domestic and external debt servicing and large spending on pay and pensions of the government employees amidst no major savings on account of the day-to-day expenses of running the government.

The government has been exploring all avenues of taxing the untaxed and applying new and innovative taxes on every conceivable business and money transaction in the country.

However, the real estate and agriculture sectors and several industries operating under the umbrella of the powerful establishment are not being taxed to their full potential. This is creating unrest among ordinary citizens and ordinary businesses alike.

Accumulation of debt today will push up the cost of debt servicing tomorrow, regardless of who is in power

The next general elections are due on February 8. It doesn’t take a genius to figure out how difficult it will be for the elected government to provide relief to people and ordinary businesses while also ensuring a further increase in tax revenue amidst the elevated cost of debt servicing.

Accumulation of debt today (domestic or external) is bound to push up the cost of debt servicing tomorrow, regardless of who is in power now and who will be in power in future.

We must not forget this disturbing aspect of the current economic performance as we celebrate some seemingly good news on the economic front — including the much talked about fall in the current account deficit (CAD).

In the first four months of this fiscal year, the CAD fell to $1.06bn from $3.12bn in the same period last year, the latest balance of payments statement of the State Bank of Pakistan (SBP) shows. Because of this shrinking of the CAD, the exchange rates are currently stable and imported inflation is under some control.

So, the declining CAD is undoubtedly commendable. But it has occurred chiefly due to unprecedented import compression, and that is not going to last. So, there are chances for the CAD to expand again once imports restart growing. However, much also depends on whether and at what pace exports of goods and services and remittances grow.

Real estate, agriculture, and industries operating under the umbrella of the establishment are not being taxed to their full potential

In four months of this fiscal year, exports of goods (freight on board value) rose to $9.78bn from $9.67bn in the same period of the last year. Exports of services also increased to $2.42bn from $2.34bn. On the other hand, in four months of this fiscal year, remittances declined to $8.8bn from $10.15bn in the same period the last year.

However, monthly inflows of remittances in October have shown a marked increase. If this trend continues in the coming months and exports of goods and services continue to expand, that should compensate partly for anticipated growth in import payments and help contain the CAD.

In the coming months, what’s worth watching is the import bill. The CAD in July-Oct 2023 has fallen to one-third of what it was in July-Oct 2022 mainly because the merchandise imports bill July-Oct this year shrank to $16.8bn (due to restrictions on imports and sluggish industrial growth) from $21bn in July-Oct last year.

The State Bank of Pakistan has liberalised import payments now, ahead of the possible release of the second tranche of $700m from a $3bn International Monetary Fund (IMF) loan in December. Furthermore, large-scale manufacturing output has restarted growing, though slowly. These two factors together will surely increase the goods’ imports bill from November onwards.

On the other hand, imports of services that have already been on the rise may rise even further as the economy picks up pace in the second half of the year, starting from January 2024. Services’ imports for July-Oct this year consumed $3.26bn, a sum substantially larger than the $2.73bn spent in July-Oct last year.

The SBP’s forex reserves currently stand at $7.18bn (as of November 17), insufficient to cover goods imports for not even seven weeks. The IMF wants our central bank to enhance its forex reserves to at least $9.1bn by the end of the fiscal year in June 2024.

That is not an easy task. Pakistan needs to ensure that its exports of goods and services grow fast, the recent uptrend seen in remittances is sustained, and foreign investment inflows start gushing.

Total net foreign investment in July-Oct this year stood at $538.8m, up 17.8pc from $457.3m in July-Oct last year. Though the increase is commendable, the growth percentage is too small to substantially impact the overall balance of payments.

During July-Oct this year, Pakistan witnessed a large balance of payments deficit of $2.067bn, according to the SBP’s latest statement. Containing this deficit is and will remain a big challenge. There is no room for over-and-above the projected external borrowing. The country now needs more non-debt creating foreign exchange — exports of goods and services, remittances and foreign direct investment.

The caretaker government officials say foreign investment is expected to come in a big way in the second half of the fiscal year (Jan-June 2024) —thanks to the initiatives taken by the civil-military-run Special Investment Facilitation Council. That remains to be seen.

Published in Dawn, The Business and Finance Weekly, November 27th, 2023