FeaturedNationalVOLUME 19 ISSUE # 30-31

Domestic debt touches unsustainable level

The latest State Bank of Pakistan figures show that Pakistan’s debt burden has reached unsustainable levels. The escalation in debt, especially domestic debt, has entered the red zone, surging by 6.5 times during the years 2011 to 2023.

At the end of fiscal year 2023, the government’s domestic debt stood at Rs 38.8 trillion. According to the State Bank of Pakistan’s (SBP) latest debt statistics released on February 13, 2024, the government’s domestic debt stock has increased to Rs 42.6 trillion in December 2023, implying an increase of 10% in the first six months of the fiscal year 2024.

In the last fifteen years (2008-2023), domestic debt has cumulatively grown at the rate of 18%. In 2008 when the PPP came to power, domestic debt amounted to Rs 3.26 trillion. However, by the end of the PPP’s tenure in fiscal year 2013, this figure had surged to Rs 9.5 trillion, (almost 60% of the GDP) reflecting a substantial growth of 23.9% over the span of five years. During the tenure of the PML-N government which ended in 2018, the debt figure had risen to Rs 16.4 trillion, marking a growth of 11.6%. Under the PTI government from August 2018 to April 2022, domestic debt increased to Rs 31.1 trillion, a rise of around 17% in four years.

What is more worrisome is that Pakistan is increasingly unable to pay off its debt and has to resort to more borrowing to meet its debt repayment obligations. As things stand, Pakistan’s debt burden is growing at a pace faster than the expansion of the economy’s net output, that is GDP. This imbalance limits the economy’s ability to grow. Bad policy choices make matters worse. Unfortunately, the bulk of debt accumulation has been used towards building a consumption-oriented economy with insufficient investment in productive sectors or industrial development.

The government borrows heavily from both domestic banks and international institutions to fund various expenditures, including costly infrastructure projects such as motorways. According to a report, domestic borrowing is predominantly allocated to bridge the fiscal deficit, which arises from the disparity between government expenditure and revenues generated from taxes and other sources. According to a report, in the last thirteen years, Pakistan has consistently faced a fiscal deficit. Low tax-to-GDP and high revenue-to-debt-servicing numbers account for reduced revenues, and increased expenses, both of which contribute to the fiscal deficit. Fiscal deficit has been on the rise due to increased federal expenditure. According to the January 2024 report of the Ministry of Finance, the consolidated fiscal deficit stood at 2.3% of GDP (Rs 2407.8 billion) in the first half of fiscal year 2024 against 2% of GDP (Rs 1,683.5 billion) last year.

Inflation is a big factor in the rising fiscal deficit. Average inflation in the first seven months of fiscal year 2024 has hovered at 28%-29% which has increased the burden of expenditure, forcing the ministry to increase borrowing from banks. As per the Finance Ministry’s January 2024 report, total expenditures surged by 45% to Rs 9,261.8 billion in the first half of fiscal year 2024, compared to Rs 6,382.4 billion the previous year. This increase has been caused by a 41% rise in current spending.

Deficit financing through short-term domestic borrowing, coupled with high interest rates, has created a serious economic anomaly. Needless to say, this situation is unsustainable. Without sweeping reforms and restructuring Pakistan will continue to sink deeper into financial and economic morass. Domestic debt servicing consumes over half of the federal budget, resulting in a significant fiscal burden. In fiscal year 2023, domestic debt interest servicing as a percentage of federal revenue and tax revenue stood at 64.2% and 56% respectively. This means debt servicing deprives other sectors of badly needed financial injection. Climate financing takes a back seat to domestic debt servicing, further deteriorating climate vulnerability.

The solution lies in re-strategising policies and projects all across the economic landscape. Government discipline through prudent spending and resource efficiency holds the key to mitigate the fiscal deficit. An immediate task is to improve the business environment to attract investors by introducing a stable legal framework to reduce risk. This calls for fiscal reforms to minimize the possibility of sovereign risk, which is exacerbated by uncontrolled spending and reliance on debt. Greater fiscal discipline is essential to lower overall risk and boost investor confidence. Equally important is the need to ensure policy consistency as investment tends to gravitate towards economies in which the investors’ money is safe from policy shocks and resulting risks.