InternationalVolume 14 Issue # 18

An alarming report

According to a new report of the World Bank, Pakistan’s public debt would jump to 17 years highest level of 82.3 per cent of the size of its economy and the budget deficit is projected to be over Rs2.6 trillion by the end of the current fiscal year. The projected levels of the budget deficit – the gap between expenditures and revenues – and the public debt to Gross Domestic Product ratio for the fiscal year 2018-19 are higher than the levels of the last year of the PML-N government. The report has also underlined the increased risk for sovereign debt default by Pakistan in recent months.

In its detailed analysis, the WB says that the debt-to-GDP ratio would jump to 82.3pc by the end of the current fiscal year as against 73.5pc left behind by the PML-N government. In 2001-02, the debt-to -GDP ratio had been recorded at 81.8pc. But Pakistan managed to win some debt relief from the Western countries that helped it lower the dangerous debt levels. It is said that from fiscal year 2019-20, the debt level may start going down gradually. But by the end of the third year of the PTI tenure, it will be still at 75.4pc of the GDP.

The elevated debt levels have increased “Pakistan’s exposure to debt-related shocks.”  But the low foreign currency reserves position and high debt ratios limit the buffers that Pakistan could use to absorb external shocks such as an increase in US interest rates and may negatively impact the government’s ability to access international markets. For developing countries like Pakistan, the 50pc debt to GDP ratio is considered sustainable. The servicing of growing public debt is the single largest expense of the budget, consuming nearly 36pc.

The WB has projected that the budget deficit would widen to 6.9pc of the GDP, which will be equal to Rs2.63 trillion, in the current fiscal year. During the last fiscal year, the budget deficit was 6.5pc of the GDP. The WB said that the budget deficit would still remain higher during the next two years as well, standing at 5.3pc of the GDP by the end of 2020-21.

Pakistan’s GDP growth is projected to slow down to 3.4pc in fiscal year 2018-19, from 5.8pc a year before, reflecting a broad-based weakening in domestic demand as monetary and fiscal policies have been tightened to contain macroeconomic imbalances. The GDP growth is expected to further slow to 2.7pc in fiscal year 2019-20, as domestic demand remains depressed. Macroeconomic imbalances, reflected in large fiscal and current account deficits are expected to resolve gradually. A relatively more stable external environment is seen to help a pickup in economic activity starting from fiscal year 2020-21 – the third year of the PTI. But still it will only be 4pc, it added.

Average inflation is expected to rise to 7.1pc during the current fiscal year and will reach 13.5pc in fiscal year 2019-20, as a result of further exchange rate depreciation and follow up increase in prices of almost all commodities. The WB has pointed out that economic uncertainty in Pakistan has increased due to protracted negotiations with the IMF. In addition, recent regional tensions had an impact on risk perceptions.

According to independent economists, 13.5pc inflation would mean that the State Bank, which has to keep real interest rates positive, will have to raise the policy rate to over 15pc.

The Washington-based lending agency has advocated further currency devaluation, hike in interest rates and fiscal tightening – the recipes that will strangle economic growth and increase poverty levels. It has added that the higher inflation rates may jeopardize recent gains in poverty reduction, since poor households in urban areas are particularly affected by increase in prices.

While making a detailed study of Pakistan’s economic woes, it puts the responsibility for the current economic imbalances on the last PML-N government. The new government has taken steps to address the imbalances, but outcomes by mid-year suggest that further adjustments will be necessary.

If one goes by the projections made by the WB, the government of Prime Minister Imran Khan cannot end the miseries of the nation. There will be more debt even in terms of the size of the economy, more inflation, more unemployment and more poverty in the country as compared to the PML-N government.

To put the country on a path to stable growth, Pakistan will need to increase its exchange rate flexibility, improve competitiveness and lower the cost of doing business. On the revenue front, reforms to improve tax administration, widen tax base and facilitate tax compliance are critical.