High interest rates propel govt expenditure

High interest rates propel govt expenditure


Finance Division report shows fiscal deficit is up, primary deficit down

ISLAMABAD (Web Desk) – Pakistan witnessed a 5.5 per cent, or Rs4,652.2 billion fiscal deficit during the July-May period of 2022-23 [FY23] which was recorded at 5.2pc, or Rs3,468.5bn, in the corresponding period of the 2021-22 [FY22].

However, there has been marked reduction in primary deficit which shrank to Rs112bn in FY23 against the previous corresponding figures of Rs945.3bn in FY 22.

It is necessary to explain to the common readers that the fiscal deficit means the government's total borrowing requirements, including interest, while the primary deficit indicates the government's total borrowing requirements, except interest.

These figures are shared by the Finance Division in its “Economic Update and Outlook” for July 2023 which says the $3bn deal inked with the International Monetary Fund (IMF) and other inflows through bilateral and multilateral arrangements will pave the way to further improve the macroeconomic environment and the confidence of economic agents.

However, it cautioned that prudent and effective economic decisions in combination with political and economic certainty resulting in continuation of friendly economic policies and enough foreign exchange financing will be required to achieve higher and sustainable economic growth.

Effects of High Interest Rate

Meanwhile, the government is unable to slash expenditure despite the fact that only a small chunk goes for the development purposes. Hence, the government spending grew by 20pc to Rs8,849.6bn during the first 11 months of FY 23 against Rs7,361.5bn in FY 22.

And here comes an alarming consequence of rate hikes – a controversial measure prescribed around the world by the IMF and top central banks.

Within this total, the current expenditure was up by 22pc to Rs8,337.8bn when compared with Rs6,843.8bn in FY22, which was caused by 80pc rise in mark-up payments owing to a higher policy rate.

Revenue Collection

As far as other some indicators are concerned, revenue collection grew by 24.4pc to Rs4,166.6bn during the under consideration period of FY 23 against Rs3,349.5bn in FY22.

But for the masses in Pakistan, it is not something to cheer about as the increase is a result of non-tax collection – a part of indirect revenue measures – which surged by 31pc thanks to the Petroleum Development Levy (PDL).

Some Other Indicators

However, the government managed to cut current account deficit to $2.6bn in FY23 from $17.5bn contraction in imports.

During this period exports dipped by 14.1pc reaching $ 27.9bn which were $32.5bn in FY22 but imports declined by 27.3pc to $52bn against $71.5bn.