Fiscal deficit financing: government borrowing increases interest payment to 58.5 percent

The government borrowing for financing of fiscal deficit has increased the interest payment to 58.5 percent of the total net estimated revenue during the current fiscal year, official documents revealed. The government has earmarked Rs 699 billion in current fiscal year budget for interest payment, which has now been increased to Rs 727 billion due to borrowing by the government for financing of fiscal deficit and high interest rate by the State Bank of Pakistan to tame the inflation.
The total estimated net revenue available with the federal government is Rs 1,242 billion after Rs 993 billion transfer to the provinces against interest payment of Rs 727 billion during 2010-11. The Finance Ministry also acknowledged that public sector deficit contributes to inflationary pressure and proves destructive for investment and growth by increasing domestic expenditure and pushing up interest rates.
The burden on the State Bank of Pakistan of financing the federal government fiscal deficit is a negative aspect of the macroeconomic situation and weakens its ability to pursue sound monetary policy. The reason behind this is that the financing of the deficit absorbs funds in the private and banking sector which would otherwise be used for investment. The financing of the deficit compelled the Central Bank of Pakistan to keep interest rates high which shrink credit to the private sector and ultimately undermines investment.
According to Finance Ministry after several years from 2000 onwards the country''s public debt reduced and brought under a degree of control, the trend since 2008 has been towards increased indebtedness. This is true both for domestic debt, which had borne the main part of the burden of financing the public sector deficit, and to external debt, in which the unavoidable recourse to borrowing up to 9 billion dollars from the IMF to address the 2008 financial crisis, has left a legacy of substantial external debt repayment liabilities for the coming 3-4 years.
This burden substantially reduces room for manoeuvring in public sector financing. This all has been happening because of failure by the government to implement the fiscal policy as on the one hand it was able to mobilise resources by bringing informal sectors in the tax net while on the other hand it was not ready to control expenditure.