The State Bank of Pakistan (SBP) in its Monetary Policy Information Compendium for January has reported that domestic debt servicing has increased by an alarming 38% in the first five months of the ongoing fiscal year. A substantial increase has been seen in the stock of permanent debt which mostly comprises Pakistan Investment Bonds (PIB), which is a high interest paying long term paper that is preferred by banks and corporates to park their excess liquidity. This will also need to be serviced, which will in turn jack up interest and principal payments in the coming months. As a result, the government is unable to divert sufficient funds towards development, which adversely affects economic growth that is already sluggish due to the pandemic; over 50% of federal expenditure is debt servicing. Another more serious and immediate problem posed by this excessive debt burden is the use of FBR tax revenue to finance interest payments; over 73% of the FBR’s tax collection was eaten up by debt servicing. It is quite a vicious fiscal spiral that the government is stuck in as it struggles to positively influence macroeconomic variables by efficiently and effectively managing its revenue and expenditure.
For decades, multiple civilian governments and military setups did not make any meaningful attempts to reform the FBR. One had hoped that the PTI, with its promise of change and rebuilding institutions would have fared relatively better but it has not panned out quite that way. Strict but necessary measures taken to expand the tax net were reversed on the first sign of protest from lobbies that would take a financial hit as a result. A new chairman was brought in from the private sector with the expectation that he would bring about a cultural change within the FBR, but instead he developed health problems, reportedly a nervous breakdown due to the targets he was given, and quit the job within eight months. The government can cut down on its expenditures all it wants but the fixed cost of debt servicing will remain as the country cannot default on its domestic debt obligations. Increasing its revenue is therefore the only way out of this debt trap.
