KARACHI: An increase of 44 per cent in the domestic debt during the previous fiscal year could strain the economy as interest payments rose at a rate of 14.5pc.

The State Bank of Pakistan (SBP) in its latest quarterly edition of Compendium July 2014 said the interest payments on domestic debt grew by 14.5pc during the first 11 months (July-May) of FY14. The final figure of the entire fiscal for interest payments has yet to come.

However, another report of the SBP showed the domestic debt rose by 44.2pc in FY14 reflecting the poor health of the economy. In the first three quarters (July-March) of FY14, the fiscal deficit was entirely met by the borrowing from the domestic sources, it said.

Though the government’s borrowing from scheduled banks fell compared to last year’s, its “borrowing needs were largely met from scheduled banks”.

Know more: Savings, investment fall in FY14

“The 44pc growth in domestic debt (stocks of domestic debt increased by Rs3.258 billion in FY14) has put enormous burden on economy in the shape of interest payments. The State Bank reported that in the first eleven months of the fiscal FY14, the amount of interest payments rose to Rs986bn compared to Rs861bn in FY13”.

It is believed that the final figure of entire FY14 will cross Rs1 trillion. The size of interest payments is expected to be more than 40pc of tax revenue. The debt servicing as a percentage of tax revenue in FY13 was 41.4pc.

The government would need more borrowing this fiscal year to meet the interest payments on domestic debt which will again increase the size of domestic debt. The debt stock as a percentage of GDP, which was 29.2pc in 2009, rose to 42.2pc in FY13. The report did not show the ratio in FY14.

Similarly, the interest payment as a percentage of GDP dropped to 4pc in FY13 compared to 4.4pc in 2009. This was due to large size of GDP.

The government has kept ambitious target of revenue collection at Rs2.8tr and wants to keep the fiscal deficit below 5pc of GDP. Economists and analysts believe this target was highly exaggerated and elusive under the situation of low investment and low savings.

Analysts in their reports put the law and order as one of the most import reasons for low economic growth while the energy crisis is another major hurdle in the way of economic progress.

Published in Dawn, August 10th, 2014