NationalVOLUME 15 ISSUE # 14

Debt burden: Mortgaging our economic future

Pakistan’s debt burden is rising rapidly, endangering our economic future. In its debt policy statement recently laid before the parliament, the ministry of finance said that the country’s total debt and liabilities that stood at Rs 29.879 trillion at the end of fiscal year 2018, had crossed Rs 41.489 trillion by the end of September, 2019, showing a massive increase of 39 percent. The liabilities constituted 86.3 percent of (Gross Domestic Product) GDP in fiscal year 2018, but have now risen to 94 percent of GDP by end June, 2019.

Available figures show that total public debt increased by Rs 7,755 billion during 2018-19, out of which Rs 3,635 billion was borrowed for meeting the federal budget deficit, Rs 3,061 billion was due to currency depreciation, Rs 927 billion was offset by higher cash balances necessary for effective cash management as the government is committed to zero borrowing from the State Bank of Pakistan (SBP) and Rs 132 billion was the difference between the face value and the realised value of Pakistan investment bonds (PIBs).

The impact of the exchange rate was favourable during the first quarter of the ongoing year which decreased the rupee value of the external public debt stock at end-September, 2019. The total debt of the government decreased by Rs 221 billion during the first quarter of FY20, which indicates that exchange rate gains on account of rupee appreciation against the US dollar were more than offset by the increase caused by financing of the fiscal deficit.

On the other hand, private sector loans recorded an increase of $1.2 billion, Public Sector Enterprises’ external debt rose by $1.3 billion, driven mainly by development loans. One of the major reasons for the sharp increase in total debt liabilities is a massive devaluation of the Pak rupee which contributed to a rise of over Rs3 trillion, although the level of debt denominated in dollar terms had not increased in the same proportion.

Another significant development is the re-profiling of domestic debt, where the government re-profiled the existing stock of State Bank of Pakistan borrowings from short-term to medium-term and to long-term. The re-profiling took place mainly in the month of June, 2019, which increased the share of long-term debt (permanent and unfunded) in the total domestic debt from 46 percent at the end of June, 2018, to 73 percent at the close of June, 2019.

This is a structural shift that has reduced the financing risk for the government as the average time of maturity of the domestic debt portfolio has increased from 1.6 years at the end of June, 2018, to 4.2 years in June, 2019, which is very close to the long-term target set by the government.

The higher domestic debt was mainly caused by a very high fiscal deficit of 9.4 percent of GDP during 2018-19, and most of the reasons behind the challenge were delay in reviewing telecom licences and the sale of envisaged state assets, besides weaker than anticipated tax amnesty proceeds, which contributed only around one percent of GDP. Profits of the SBP also witnessed a steep decline during 2018-19, as the central bank incurred heavy exchange losses on its external liabilities. Other factors contributing to the sharp rise in the domestic debt included a sharp rise in domestic interest rates, exchange rate depreciation, some legal constraints on the revenue side and an overall slowdown in the economy that resulted in low revenue collection.

The situation is grave which requires the government to make every possible effort to curtail the budget and external sector deficits to the minimum to contain the TDL within reasonable limits. The current account (C/A) deficit has been contained to a large extent, but the government has not made much headway on the fiscal side. There is an urgent need to reduce and ultimately eliminate the present high level of fiscal deficit, so that the level of the domestic debt could be contained to a reasonable level.

Another rising challenge is debt servicing, which is consuming almost half of the tax receipts mobilised by the Federal Board of Revenue (FBRP. The parliament had promulgated the Fiscal Responsibility and Debt Limitation (FRDL) Bill in March, 2005, aimed at eliminating the revenue deficit and reducing the public debt to prudent levels. The Bill, which became law after its passage by the National Assembly, was aimed at bringing down the revenue deficit to zero by 30th June, 2008, and maintain a revenue surplus thereafter to reduce the total public debt to 60 percent of GDP by June, 2013, and maintain it at the level in the subsequent years.

But all governments violated the law and indulged in reckless borrowing. Let the present government break the tradition by curtailing its borrowing needs. It can do it by boosting tax and non-tax revenue and exports. Another method is to cut all unnecessary expenditures and adopt an austerity regime at all levels of administration.