Islamabad: According to Pakistan's central bank's weekly update, commercial bank financing to federal and provincial governments surged to PKR 3.06 trillion from July 1 to April 14, 2023, compared to PKR 944.54 billion in the same period of last year, Express Tribune reported.

On the other hand, credit to the private sector slowed by 5.44 times to PKR 219.92 billion compared to PKR 1.19 trillion last year.

Talking to The Express Tribune, KASB Securities Head of Research Yousuf Rahman said "Financing is being pulled out of the economy and being provided to the government."

He elaborated that the government's budgetary borrowing was on the rise mainly to pay interest costs or debt servicing of the historically high debt. "This is a non-productive expenditure."

Interest payments are expected to grow to PKR 5.5 trillion which is 6.5 per cent of Pakistan's GDP) in the current fiscal year compared to the government's earlier estimate of PKR 3.9 trillion, 4.7 per cent of GDP.

The hike of a cumulative 400 basis points in the central bank's key policy rate in March-April 2023 to 21 per cent has inflated the interest payments. The government's other budgetary expenditures include monthly pay and pensions, social spending and flood-related expenditures, Express Tribune reported.

Besides, rising inflation was a leading factor behind the growth in the requirement for new financing by the government.

The increased bank financing for the government proves harmful to the economy as such funds should have been provided for productive activities.

Central bank data showed that bank credit to the private sector considered an engine of economic growth, dropped over fivefold in the period under review during the current difficult times. It clearly showed that businesses had been badly hit by the ongoing economic and political crisis, Express Tribune reported.

To recall, the performance of the large-scale manufacturing (LSM) sector remained poor with a contraction of 5.56 per cent in the first eight months (Jul-Feb) of FY23, according to the Ministry of Finance's latest monthly economic update and outlook for April 2023.

According to experts, the exorbitant hike in the policy rate made bank credit expensive and out of reach of the private sector.

Moreover, bank financing to state-owned enterprises (SOEs) increased 21 times in nine and a half months of FY23 to PKR 249 billion compared to PKR 12 billion in the corresponding period of last year, Express Tribune reported.

Although data breakdown was not available, the financial crisis suggests that the SOEs including energy firms would have borrowed money to continue to run their operations.

A leading energy firm reported to Pakistan Stock Exchange last week that a continuous surge in circular debt and high inflation forced it to borrow more from banks.

KASB Securities Head of Research Yousuf Rahman said the government's high borrowing would push up the fiscal deficit in FY23 against the initial estimates.

The deficit will also widen due to less collection of taxes against the target. Latest reports suggest the government collected PKR 400 billion less taxes in the first 10 months of FY23 compared to the target of PKR 6.02 trillion, Express Tribune reported.

Domestic borrowing has remained high due to the absence of external financing. Global lending institutions and some friendly countries have put on hold their funding decisions, waiting for the revival of IMF's USD 7 billion loan program.