EconomyVolume 12 Issue # 10

Debt: A back breaking burden

Latest figures quoted by both national and international agencies show that Pakistan’s debt problem is spinning out of control. The overall debt is estimated at 12.7 trillion rupees in 2016, which is considerably higher than the 9.5 trillion rupees in 2013. External debt, at 73 billion dollars, has also increased substantially, compared to 61 billion dollars in 2013. According to the latest report by the State Bank, the external debt of Pakistan increased to $72.9 billion in the second quarter of 2016 from $69.5 billion in the first quarter of 2016. External debt of Pakistan averaged $50.6 billion from 2002 until 2015, reaching an all time high of $72.9 billion in the second quarter of 2016 and a record low of $33.1 billion in the third quarter of 2004. Pakistan also recorded a Government Debt to GDP ratio of 64.80 percent. This averaged 69.76 percent from 1994 until 2015, reaching an all time high of 87.90 percent in 2001 and a record low of 56.40 percent in 2007. Another report says that Pakistan’s external debt has registered an increase of 75 percent between 2006 and 2015, as foreign loans amounting to $27 billion dollars were obtained during the last two-and-a-half years. If Pakistan continues to acquire external loans at this pace, the amount is likely to swell to $90 billion by 2020. According to economic experts, Pakistan will have to obtain more funds from the International Monetary Fund and other financial institutions to return its loans. The process of paying back the foreign loans secured from the IMF and the World Bank will commence from 2017, and more loans will have to be obtained to pay back previous loans.

The external debt figures compiled by renowned economist and the country’s former finance minister Dr. Hafiz Pasha are about $14 billion higher than the projections made by the International Monetary Fund. Another well known economist, Dr. Ashfaq Hasan, recently wrote that the speed at which the governments have borrowed over the last several years in general and during the last two-and-a-quarter years in particular is a matter of concern for the future of the country. According to him, Pakistan’s total stock of external debt and liabilities (EDL) stood at $65.2 billion in June 2015 as opposed to $40.3 billion in June 2007. It grew at an average rate of 1.4 percent per annum during 2000-2007, but its growth accelerated to an average of 6.2 percent per annum during 2008-15.That the country is faced with a worsening debt situation is also evidenced by the IMF’s latest debt projection for fiscal 2015-16, which is higher by $11.6 billion compared to the estimates given in its first report in September 2013. The IMF had then projected that Pakistan’s external debt would increase to $58.6 billion by 2015-16. But two years later, the agency’s ninth review report estimates the external debt at $70.2 billion by the end of the current fiscal. In this connection it is relevant to note here that in the last four months the government borrowed $956 million from the commercial banks without competitive bidding to meet its foreign currency reserves requirements. In its September 2013 report, the IMF had given the country’s total public debt projections under “reform scenario” and “no reform” scenario. Under the reform scenario, the total public debt-to-GDP ratio was to fall to 60.5% by the end of 2015-16. Under the no reform scenario, the debt-to-GDP ratio had been projected at 63.6% by 2015-16. However, the latest report says that by the end of current fiscal year the debt-to-GDP ratio will be 65%, which is worse than no reform scenario. For the next fiscal year 2016-17, the IMF’s projections are $13.2 billion higher than the projections it made in its first report. The IMF has now projected the external debt to grow to $72.1 billion or 63.2% of the GDP. However, these are still lower than the $77.2 billion projections that independent economists are making for the next fiscal year.

The rising pile of debt not only shows bad management, but also underscores the need to implement reforms to curtail debt. But, instead of adopting reform measures to improve the situation, in its debt policy statement for 2015-16 submitted to the National Assembly, the government has tried to hide the rapid growth of external debts and liabilities in comparison to its foreign exchange earnings by excluding liabilities. The borrowings under China-Pakistan Economic Corridor and for projects financed outside the national development budget have been excluded from the debt analysis. By September 2015, the external debt, including liabilities, stood at $66.5 billion. By excluding the liabilities, the figure has been reduced to $51.9 billion. The debt analysis also excludes the average cost of debt to hide the growing costs due to expensive borrowings under Eurobonds and from commercial banks. In 2005 Pakistan’s Parliament put a limit on debt and for this purpose enacted the Fiscal Responsibility and Debt Limitation Act, 2005. One of its clauses stipulated that “within a period of ten financial years, beginning from the first of July, 2003 and during the thirtieth of June, 2013, the total public debt at the end of the tenth financial year does not exceed sixty per cent of the estimated gross domestic product for that year and thereafter — maintaining the total public debt below sixty per cent of gross domestic product for any given year.” The government has violated the Fiscal Responsibility and Debt Limitation (FRDL) Act, as it could not bring down debt stocks to sustainable levels prescribed under the law. Despite excluding so many elements from the total debt, the repayment capacity has further weakened due to an increase in debt-to-revenue ratio. Another point of concern is that the country’s ability to spend on development has shrunk further due to increased spending on debt servicing. The country’s average time to maturity of external debt has also worsened, standing at 9.4 years owing to reliance on short-term loans.

All governments take loans for meeting their development needs. But such liabilities are always kept within limits to avoid distortions in the economy and achieve a balance between expenditure and income. But, in our case, the debt management issue has never been handled in the best interests of the economy. Needless to say, the only way to reduce the debt level is through fiscal prudence. Pakistan cannot come out of debt bondage without a complete change in the style of governance. Pakistan is a poor country with low productivity and low per capita income. But our rulers live a more luxurious life than those of the wealthy countries. And to finance their luxuries they borrow recklessly. This reliance on foreign aid, which is an euphemism for loan, must end. To this end both the media and civil society will have to play a more pro-active role in order to mobilize public opinion.