FeaturedNationalVOLUME 18 ISSUE # 40

Pakistan’s debt dilemma

The economic landscape of Pakistan has been marked by a significant surge in debt and liabilities during the fiscal year FY23. As per the State Bank of Pakistan’s latest data, the nation’s total debt and liabilities increased by 29 percent, reaching a staggering Rs77.104 trillion. While external debt showed a decline, internal debt saw a considerable rise, impacting key economic indicators.

Pakistan’s current fiscal scenario highlights a challenging path ahead, with its debt and liabilities reaching critical levels. The exponential growth of debt, both domestic and external, underscores the urgency for comprehensive fiscal reforms. As the government navigates these intricate challenges, prudent fiscal management and strategic allocation of resources will be essential to mitigate the adverse effects of the burgeoning debt burden. The road to financial stability requires concerted efforts, transparent strategies, and disciplined execution to steer Pakistan’s economy towards sustainable growth and long-term prosperity.

Interestingly, the gross external debt of the nation saw a decline of $6 billion over the same fiscal year, reaching $124.3 billion compared to the previous FY22 figure of $130.3 billion. In terms of GDP percentage, the total debt and liabilities ratio reached 91.1 percent, showing an increase from the 89.7 percent recorded in FY22. Excluding liabilities, Pakistan’s total debt in FY23 amounted to $72.991 trillion, contrasting with Rs56.837 trillion in FY22. This showcased a growth of 28.4 percent, compared to the 24.7 percent witnessed in the preceding fiscal year. The debt-to-GDP ratio stood at 86.2 percent, as opposed to the 85.3 percent of the previous fiscal year.

Analyzing the data, it is apparent that domestic debt surged to Rs38.8 trillion in FY23, marking a rise from the Rs31.085 trillion in the previous fiscal year. The economic impact of this substantial increase in debt and liabilities is evident in the realm of debt servicing, which spiked to Rs9.819 trillion in FY23, compared to FY22’s figure of Rs5.578 trillion. This represents a considerable year-on-year growth of 76 percent, with the debt servicing percentage relative to GDP standing at 11.6 percent, a jump from the 8.4 percent recorded in FY22.

Interest payments on debt amounted to Rs5.935 trillion, up from the previous fiscal year’s Rs3.331 trillion. The GDP of FY23 witnessed a significant growth to Rs84.657 trillion, a contrast to FY22’s Rs66.623 trillion. Despite the reduction in external debt size in FY23, external debt servicing increased by nearly 25 percent. However, external debt servicing saw an increase of $5.7 billion, reaching $20.8 billion in FY23 from the preceding year’s $15.1 billion. The FY23’s political and economic uncertainties led to challenges in obtaining loans from commercial banks and other sources. Eventually, the government secured a Standby Arrangement of $3 billion for nine months, facilitating inflows from Saudi Arabia and the United Arab Emirates and allowing for the extension of certain Chinese loans.

In terms of detail, Pakistan made payments of $16.39 billion toward principal amounts and $4.420 billion in interest on external debts. Looking ahead to FY24, the country is projected to allocate around Rs7.3 trillion for debt servicing, encompassing both interest and principal payments. This constitutes 50.5 percent of the total budget outlay of Rs14.46 trillion. This significant debt servicing leaves minimal room for the allocation of funds to development projects and other expenditures, prompting the government to turn to borrowing from both domestic and foreign sources.

The gross public debt escalated from Rs44.4 trillion in March 2022 to Rs62.9 trillion by the conclusion of FY22-23, as indicated by the monthly debt bulletin from the State Bank of Pakistan. This 15-month increase of 41.7 percent highlights the absence of an effective strategy to curtail the growth. Consequently, the federal government debt surged to Rs60.8 trillion by June 2023, reflecting an addition of Rs18 trillion during the 15-month rule of the PDM government.

The rapid growth of public debt is attributed to uncontrolled expenditures, inadequate revenue collection from sectors such as real estate, services, and agriculture, as well as the depreciation of the rupee against the dollar. Under the administration of former Prime Minister Imran Khan, the public debt increased by Rs18.1 trillion in 44 months. The Shehbaz Sharif government surpassed this threshold, adding Rs18.5 trillion in just 15 months. Notably, the pace of public debt accumulation is evident in the fact that the PPP and PML-N added Rs18 trillion to the debt stock from 2008 to 2018, and Rs18 trillion was added from August 2018 to March 2022 by Imran Khan’s government. The PDM government added Rs18.5 trillion in a mere 15 months.

Currently, the public debt corresponds to 74.3 percent of the GDP. The rapid depreciation of the currency also contributed to the federal government’s debt burden. The domestic debt of the federal government surged to Rs38.8 trillion, adding Rs10.8 trillion (a 38 percent increase) over the past 15 months. At the end of Imran Khan’s tenure, domestic debt stood at Rs28 trillion.

Alarmingly, the external debt of the federal government surged by 48 percent to Rs22 trillion in 15 months, showcasing a net increase of Rs7.1 trillion in external debt, largely attributed to currency depreciation. By the end of March 2022, external debt had reached Rs14.9 trillion, excluding IMF liabilities.

With external debt constituting roughly 36 percent of the total debt, exchange rate fluctuations can significantly impact the debt load without borrowing a single dollar. The rupee-to-dollar parity plummeted from Rs183.5 to Rs286.4 in just 15 months, representing a sharp drop of Rs103 or 56 percent. This substantial and rapid depreciation also contributed to inflation.

The mounting debt burden has led to a substantial rise in the cost of debt servicing, which is projected to remain above Rs5.8 trillion by the close of the last fiscal year. The unbridled borrowing has driven Pakistan’s total debt and liabilities to reach Rs77.1 trillion, equivalent to 91.1 percent of the national economy’s size. For a developing nation like Pakistan, any ratio exceeding 50 percent is unsustainable. Throughout the four years of the IMF programme, Pakistan’s efforts to raise the FBR’s tax-to-GDP ratio have faltered, casting doubts on the effectiveness of foreign loans secured in the name of tax reforms. There has been a lack of serious endeavors to control expenditures, with the Shehbaz Sharif government, like its predecessors, continuing to spend on projects and initiatives falling under provincial jurisdiction as defined by the Constitution.

Pakistan stands at a pivotal juncture, with its fiscal horizon overshadowed by burgeoning debt and liabilities. The exponential rise in debt, both domestic and foreign, accentuates the urgency for sweeping fiscal reforms. In the face of these intricate challenges, prudent fiscal management and strategic resource allocation are imperative to mitigate the negative fallout of the escalating debt load. A journey toward fiscal stability necessitates cohesive efforts, transparent strategies, and steadfast execution, paving the way for Pakistan’s economic trajectory toward sustainable growth and enduring well-being.