FeaturedNationalVOLUME 19 ISSUE # 34

Mounting debt crisis: A looming financial catastrophe

The State Bank of Pakistan (SBP) has recently unveiled alarming data indicating a significant surge in the federal government’s debt. Despite a relatively stable rupee, the debt levels have skyrocketed, raising concerns about the country’s financial stability.

The central bank of Pakistan disclosed a noteworthy escalation in the federal government’s total debt, exclusive of liabilities and IMF obligations, which soared by Rs1.73 trillion within a single month. Despite the rupee maintaining a stable stance, the federal government’s debt surged to Rs67.8 trillion in May, denoting one of the most precipitous monthly increments, averaging an addition of Rs56 billion daily. Consequently, by the end of May, the government’s debt culminated at Rs67.8 trillion. Cumulatively, Rs7 trillion was appended to the debt ledger during the initial eleven months (July-May) of the preceding fiscal year, with an average daily accretion of Rs21 billion. However, May alone witnessed a stark Rs56 billion per day surge. Such extraordinary hikes were previously observed during severe currency volatility episodes.

In the last fiscal year, the rupee appreciated against the US dollar and sustained stability during the April-May interval. Compared to June of the preceding year, the rupee’s valuation not only stabilized but also exhibited enhancement in May. This constancy played a crucial role in mitigating the augmentation of external debt, coupled with the low credit ratings that deterred foreign commercial banks from proffering new loans to Pakistan.

The rupee-dollar exchange rate, which stood at Rs286.39 in June last year, ameliorated to Rs278.38 in May of this year – a gain of Rs8 per dollar. Consequently, the external federal government debt diminished from Rs22 trillion to Rs21.6 trillion over the past year due to the rupee’s appreciation against the dollar.

The federal government’s total domestic debt ascended to Rs46.2 trillion, marking an increase of Rs7.12 trillion within one month. This scenario casts a spotlight on the debt management efficacy of the finance ministry and its fiscal operations. The abrupt debt spike also insinuates potential disarray in the government’s fiscal maneuvers. The fiscal year’s budget deficit target was pegged at Rs7.5 trillion, now anticipated to be missed by approximately Rs1 trillion.

The Rs1.733 trillion surge in public debt in May alone implies that the government procured more funds than necessary for fiscal operations. Any borrowing exceeding the budget deficit would contribute to unnecessary interest cost escalation. This surge was predominantly in the government’s long-term debt, which escalated from Rs32 trillion to Rs33.4 trillion – an increment of Rs1.4 trillion within one month. The short-term domestic debt swelled by Rs356 billion within the same period, according to the central bank. The government’s long-term borrowings were procured at an exorbitant rate exceeding 23%. It remains unclear how much of the Rs1.4 trillion was acquired at a fixed interest rate versus a floating rate. Any borrowing at fixed interest rates exceeding budgetary requirements might impose an undue burden on taxpayers.

The escalating debt burden has propelled the cost of interest payments from Rs8.3 trillion in the previous fiscal year to Rs9.8 trillion this year. From the Rs1.7 trillion in additional taxes levied in the budget, Rs1.5 trillion will go directly to commercial banks. Despite ongoing promises to the IMF and the World Bank, the Debt Management Office remains under-resourced, and the Ministry of Finance appears reluctant to bolster its capacity.

The National Assembly has sanctioned the federal government to borrow Rs33.8 trillion for principal loan repayment and debt servicing this year. Excluding the Rs9.8 trillion interest cost, which is included in the federal budget, the remaining amount will not be accounted for in the budget and will be borrowed directly from domestic and foreign markets to repay past loans accumulated by successive governments.

Interest payments on domestic and foreign loans will consume approximately 52% of the proposed Rs18.9 trillion budget for this fiscal year. The government plans to borrow Rs19.1 trillion to repay maturing domestic debt this fiscal year. Additionally, it will borrow another Rs8.5 trillion to finance the budget deficit. The government is relying on debt to fund subsidies, defense, development, and civil government operations.

The government’s efforts to curb the power sector’s circular debt through tariff increases have failed. The Power Division reported to the Cabinet Committee on Energy that the circular debt rose to Rs2.655 trillion by the end of May, exceeding the IMF’s permissible limit by Rs345 billion.

Last year, the government increased electricity prices by around Rs8 per unit to control the circular debt, but it remained unmanageable by the end of May. Recently, electricity prices were hiked again by up to Rs7.12 per unit—a move likely to backfire as it did in the previous fiscal year.

Pakistan’s debt predicament is intensifying, posing a formidable challenge to the nation’s economic stability. With interest payments consuming a substantial portion of the budget and new borrowings escalating, the government’s fiscal policies seem inadequate to address the root causes of the debt crisis. Without substantial reforms and effective debt management strategies, Pakistan risks plunging deeper into financial turmoil. The urgent need for a sustainable fiscal roadmap has never been more critical.