NationalVOLUME 16 ISSUE # 03

Better debt management a key to rapid economic growth

Debt is the bugbear of Pakistan’s economy. It haunts every new government and is the main cause of their failure in turning the situation around. The Pakistan Tehreek-i-Insaf (PTI) government faced the same challenge when it came to power. During its first year in office, the government tested the waters but could not accomplish anything. However, in the second year, it has considerably improved its public debt management system and succeeded in reducing the cost of borrowing besides slowing down the pace of debt accumulation.

No doubt, the public debt swelled to unsustainable levels in the first two years of the PTI government, but the latest figures show that the debt build-up was 50pc less in the second year as compared to the first year. In the first year, the public debt rose due to an addition of Rs3.1 trillion caused by currency devaluation and a build-up of Rs1.2 trillion cash buffer. By excluding the two factors, the increase in the public debt in the first year was almost equal to that in the second year. Significantly, the cost of borrowing of three-year, five-year and 10-year Pakistan Investment Bonds (PIBs) was lower as compared with the first year but the gains were lost due to the unrealistically high-interest rate of 13.25pc set by the central bank.

As we know, the cost of borrowing remained above the policy rate due to increasing inflation in the first year. The cost fell in the second year because the inflation rate came down but the State Bank of Pakistan (SBP) did not cut the policy rate. The debt management gains could also have been lost if the government had not moved swiftly to revive the stalled International Monetary Fund (IMF) loan programme. A well-negotiated IMF programme, based on ground realities, has strengthened the hands of the Ministry of Finance in enforcing fiscal discipline.

For a fair assessment of the debt situation, we should keep the overall context in mind. During the fiscal year 2018-19, which was the first year of the PTI government, the Finance Ministry contracted long-term debt at fixed rates that were 2.9pc to 3.9pc above the central bank’s policy rate. But in the fiscal year 2019-20, the cost of long-term debt was either slightly above the policy rate or was lower than it, according to statistics compiled by the ministry.

During the first nine and a half months of the last fiscal year, the SBP kept the interest rate at 13.25pc, which not only increased the cost of borrowing for the federal government but also stifled economic growth. However, banks offered long-term debt to the federal government at rates that were either 0.2pc above the policy rate in case of three-year bonds or below the policy rate, according to the statistics.

The PTI government came to power in August 2018 and it took about 10 months to finalise a deal with the IMF – a phase of uncertainty that caused huge damage to the economy. According to economic experts, the PTI government was not very confident in its first year in power and delayed many crucial decisions. As a result, in the last two years, the PTI government added 45pc to the debt stock, exposing it to severe criticism. The gross public debt, which was the direct responsibility of the government, stood at Rs36.4 trillion by the end of June this year.

The Finance Ministry statistics show that Rs7.7 trillion was added to the total public debt in the first year and the accumulation in the second year was Rs3.7 trillion. As compared to the first year, the accumulation was lower by 52pc. In terms of the size of the economy, the gross public debt shot up to 86.1pc of GDP in the fiscal year 2018-19, up from 72.1pc a year ago. However, in the second year, the ratio deteriorated further by 1.1pc of GDP to 87.2pc.

The government’s domestic debt surged to Rs23.2 trillion with an addition of Rs6.8 trillion in the last two fiscal years. Out of this, Rs4.3 trillion was added in the first year and Rs2.6 trillion during the second year. The PTI’s fiscal performance was also marred by high interest rates and steep currency devaluation of about 39pc in two years. But the devaluation was less in the second year which helped slow the debt build-up. During the first year, the currency devaluation added Rs3.1 trillion to the public debt – 40pc of the total build-up. In the second year, the contribution of currency devaluation was Rs400 billion or 11pc of the additional debt. In the first year, interest expenses stood at Rs2.1 trillion, which contributed 27pc to the debt accumulation. In the second year, the interest expenses shot up to Rs2.6 trillion and had a staggering 71pc share in the additional debt.

From the analysis, it is clear that without prudent debt management, the government cannot put the economy back on track. It must control its appetite for more loans and, instead, put more reliance on domestic revenue generation and export earnings.