NationalVOLUME 16 ISSUE # 05

Mounting debt: Blame game tactics

Pakistan has borrowed over $24b in the first two years of the Pakistan Tehreek-I-Insaf government of Prime Minister Imran Khan. He had come to power on the promise of breaking the “begging bowl” and run the affairs of the government with indigenous resources and curtail its expenditure to restore Pakistan’s dignity in the comity of nations. Instead, the begging bowl has become deeper and wider in his government.

It is irony that his government continues to blame past rules and their alleged corruption for the mounting debt instead of accepting responsibility for its failure to increase revenue and decrease expenditure. In a recent briefing to the cabinet, the Ministry of Finance said $24 billion loan had been obtained for servicing of debt and repayment for loans obtained by previous governments. In a presentation on public debt accumulated between June 2018 and June 2020, Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh termed the last fiscal year (2019-20) a “good year” for debt. In the previous fiscal year, which was the second year of the PTI government, the pace of debt accumulation decreased by more than half as compared with its first year. The cabinet was informed that total public debt had increased to Rs36.3 trillion or 87.2pc of gross domestic product (GDP) as of June 30, 2020. There was an addition of Rs11.35 trillion or 45pc to total public debt in the past two years. When the Pakistan Muslim League-Nawaz (PML-N) government left power, public debt stood at Rs24.95 trillion or 72.5pc of GDP. Over Rs7.7 trillion was added to public debt in the first year of the PTI government and debt accumulation in the second year was Rs3.7 trillion, lower by 52pc as compared to the first year. About 42pc of the additional public debt in the past two years was due to debt servicing expenses and another 31pc because of currency devaluation.

The exchange rate remained stable in the second year, which helped contain the debt build-up. The finance adviser warned the cabinet that public debt would remain a major challenge and required careful management. According to the government, the massive surge in public debt in the first year was because of correction of a “flawed exchange rate policy” of the PML-N government that added Rs3.1 trillion to debt and Rs2.1 trillion in interest payments on past debt. Over Rs1 trillion was added to generate cash buffers.

Foreign currency debt jumped to 36pc of the total debt in the last fiscal year, according to the annual debt review report of the ministry. The annual Debt Review & Debt Bulletin for fiscal year 2019-20 showed worsening fiscal indicators. However, it said they did not breach the maximum limit set in the medium-term debt management strategy 2019-23. The share of external loans in total public debt increased and the average maturity time for domestic debt slightly worsened. “Around 36pc of the total public debt was denominated in foreign currencies at end-June 2020, exposing the government to exchange rate risk,” the report said.

The Pakistani rupee has devalued by 39pc in two years of the PTI government, which increased public debt phenomenally. If the value falls further, Pakistan’s debt liabilities will also jump due to increased exposure to foreign loans. As against the last medium-term debt management strategy that expired a year ago where the maximum limit for external debt had been fixed at 35pc, the PTI government increased it to 40pc in the new debt management strategy. It means the government will continue to rely on external debt as exports, foreign direct investment and remittances are not expected to improve in the near future.

The share of external public debt in total public liabilities was 32.2pc by the end of the PML-N tenure, which has now deteriorated to 36pc in two years. In 2018-19, the first year of the PTI government, it was 34.8pc. The report maintains that the government remained within stated benchmarks of risk indicators during FY 2019-20, but a majority of the indicators are moving towards red lines and it needs a compressive policy to enhance revenues and non-debt creating inflows for correcting the imbalances. Gross financing needs remained at 31pc of gross domestic product (GDP) in the last fiscal year against the maximum limit of 35pc set in the policy. About half of the government’s public debt would mature within three years. This includes 36pc of domestic debt and 13pc of external debt.

The ministry said domestic borrowing was made entirely from financial markets. No borrowing was made from the State Bank of Pakistan (SBP). The policy reflects the government’s commitment to greater fiscal discipline, macroeconomic stability and development of domestic financial markets. More than 90pc of the borrowing needed to finance the fiscal deficit in FY 2019-20 was made through longer-term loans and bonds. Also, with effect from July 1, 2020, all institutional investors have been barred from investing in saving schemes. The government issued Rs342 billion worth of new guarantees or rolled over existing ones in favour of loss-making public sector enterprises. It took the volume of total outstanding guarantees to Rs2.34 trillion, an addition of 18.8pc in one year. The government was required to restrict the stock of outstanding guarantees to Rs1.6 trillion under the International Monetary Fund (IMF) agreement.

About Rs271 billion worth of guarantees were rolled over in favour of Pakistan Holding Private Limited, which showed that the government once again failed to address the issue of circular debt. The finance ministry also gave Rs33 billion worth of sovereign guarantees for the PIA, Rs20 billion for the Pakistan Atomic Energy Commission and Rs18 billion for the Water and Power Development Authority. The volume of new government guarantees issued during a financial year is limited under the Fiscal Responsibility and Debt Limitation Act, to 2pc of GDP.

Overall, total public debt was recorded at Rs36.4 trillion at the end of June 2020, recording an increase of Rs3.7 trillion during FY 2019-20. The public debt-to-GDP ratio increased from 86.1pc in June 2019 to 87.2pc in June 2020. But it was far less than the increase in the first year of the PTI government when it jumped from 72.5pc to 86.1pc.

The government may have some justifications for the mounting public debt as according to estimates provided by the Ministry of Finance, each rupee loss vis-a-vis the US dollar adds around Rs100 billion to national debt. Between April 2019 and June 2020, the rupee lost over 25pc against the dollar, which raised debt repayment by a whopping Rs2.5 trillion. Past governments kept the rupee artificially overvalued to show lower annual debt servicing requirements. Pakistan may face challenges in collection of revenue in taxes and workers’ remittance could also drop. The situation may increase the debt-to-GDP ratio to 90pc in FY21 and expected to reduce to 85pc by FY25, Fitch Ratings estimates. It means Pakistan’s debt problem will not end soon. The PTI government may not have a quick fix solution for it but it has no excuse for not curtailing its expenditure and increasing revenue.