Pakistan’s Debt Servicing Costs Set to Soar to Rs. 5.2 Trillion

As Pakistan struggles to close budget gaps, debt servicing costs are expected to rise to an alarming Rs. 5.2 trillion in the current fiscal year.

The IMF has tasked Pakistan’s government with raising the general sales tax (GST) rate to at least 18 percent in order to raise more taxes, according to the Express Tribune.On the same day that the lender requested an increase in the standard GST rate, the government released revised macroeconomic projections that showed inflation rising to 29 percent and economic growth slowing to 1.5 percent.

The government previously revealed the specifics of a $30 billion external financing plan and projected inflows with the lender. However, the IMF expressed doubts about the country’s ability to raise sufficient funds from capital markets and foreign banks during these difficult times.

This week, the Pakistani side exchanged data with the IMF on the country’s debt profile, foreign inflows, and macroeconomic projections. Following a discussion, the lender demanded that the GST rate be raised to 18% in order to raise additional taxes in the current fiscal year.

While the IMF appeared to be pleased with the Federal Board of Revenue’s (FBR) revenue projection plan to meet its Rs. 7.470 trillion target, it also insisted on additional tax and non-tax revenue measures to meet all budgetary targets. The Pakistani side was concerned about the impact of such a broad-based execution, fearing that the total cost of debt servicing would exceed Rs. 5.2 trillion as a result. It should be noted that the government budgeted Rs. 3.95 trillion, but revised projections were Rs. 1.2 trillion, or 31% higher.

The Rs. 5.2 trillion represents 54% of the budget announced in June last year, and massive spending projections could lead to an IMF demand for higher taxes or cuts in other expenses, creating fiscal space despite challenges.

Separately, the IMF expressed concern about the planned increase in electricity prices to reduce circular debt’s inflationary impact. Further increases in electricity prices, according to government projections, could push inflation to 29 percent.

The IMF was also briefed on debt profiling, and the global lender requested that the authorities look into the possibility of contracting fixed-rate domestic loans for longer tenors. The Pakistani side responded that it had planned for $30 billion in gross external loans this fiscal year, but the lender was not convinced.

Pakistan’s economic survival is in jeopardy, as its gross official foreign exchange reserves fell to $3 billion on Thursday. Regardless, the government remained confident that floating Eurobonds would raise $1.5 billion and had included them in the external financing plan. Furthermore, the Ministry of Finance saw $6.3 billion materialise in the current fiscal year, an extremely optimistic figure. The IMF believed that raising $8 billion from capital markets and foreign commercial banks would be difficult for Pakistan.

Other concerns raised by the IMF include the government’s ability to secure at least $4 billion in debt repayments, excluding rollovers. Pakistan is hoping to receive $11 billion from multilateral creditors during the current fiscal year, but this is contingent on the IMF programme being revived.

As of now, some lenders have been very helpful to Pakistan, but major lenders such as the World Bank are waiting for the IMF before sending more money to the cash-strapped South Asian nation.

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