NationalVolume 14 Issue # 14

Pakistan’s debt trap

According to the latest figures released by the State Bank, the country’s total debt and liabilities have increased to Rs 30.875 trillion by end-September, 2018, as compared to Rs25.11 trillion at the end of June, 2017 and Rs 29.89 trillion at the end of FY18.

So far as external and liabilities are concerned, these stood at $96.733 billion at the close of September, 2018. During 2017-18, these liabilities posted a huge increase of $11.86 billion to reach $95.342 billion, exposing public portfolio debt of the country to huge exchange rate risk. Of the $96.733 external debt and liabilities, $65 billion comprises long-term debt while over $31 billion is in short-term debt. Significantly, round 32 percent of the total public debt stock is denominated in foreign currency.

The phenomenal increase in overall debt and liabilities during the last few years is a matter of serious concern. The main reason for this is bad financial management by successive governments. As we all know, a large part of the budget goes into debt servicing, leaving little room for development expenditures which badly affects the prospects of growth, besides adversely affecting social sectors like health and education. To quote one figure, interest payments during FY18 have amounted to Rs 1500 billion out of the total current expenditures of Rs 5854 billion. This expenditure is also the highest in the budget and almost equal to the total development expenditures of Rs 1584 billion during 2017-18. Other factors driving the debt burden include the macro-economic imbalances and widening twin deficits which have quickened the pace of debt accumulation.

Taking foreign loans on floating interest rates is another big blunder committed by previous governments. In the context of the rising global interest rates, a stressed external account position and the possibility of further depreciation of the rupee in the exchange market necessitate the allocation of higher rupee resources in the budget for debt servicing. Although the present government is aware of the situation and trying to take remedial measures, yet the position in the external sector has improved only a little bit and continues to be precarious in the sense that the huge current account deficit still exist and is being financed through bilateral loans and floating of bonds, which would result in higher debt stock and debt servicing in foreign exchange in future.

 Similar is the position with the domestic debt. The overall fiscal deficit is likely to be higher than the target prescribed for FY19. The performance of many Public Sector Enterprises (PSEs) also deteriorated over the past many years, demanding extra allocations from the budget. The government has taken the initiative to set up “Sarmaya-e-Pakistan Holding Ltd (SPHL)” to get the PSEs out of the administrative control of various ministries and revive loss-making PSEs. But these initiatives are not sufficient to contain or reduce the outstanding debt and debt servicing of the government. Much more needs to be done to check the mounting level of debt. Otherwise, the country’s options to devote necessary resources to more important items of expenditure would be further limited.

The latest figures show that the PTI government is now committing the same mistake as the previous governments. The Pakistan Banao Certificates have been launched which envisage an interest of 6.25 percent for those maturing in three years and 6.75 percent for those maturing in five years. The government is also planning to borrow around Rs200 billion for the power sector arrears from Islamic financing through a consortium, over and above the more than Rs100 billion already borrowed from a consortium of banks led by National Bank. This is commercial borrowing from abroad with a small amortization period and at a high rate of return.

The government has decided to raise debt at a time when both Fitch and Standard & Poor’s, two out of three major global rating agencies, have downgraded Pakistan’s ranking – the former downgraded Pakistan’s foreign currency issuer default rating from B to B negative and the latter lowered Pakistan’s long-term sovereign credit rating soon after the government launched the five-year dollar-denominated Pakistan Banao Certificates from B to B negative. The interest rate on the debt instruments is more than double the prevalent rate in the international marketplace and this, coupled with the rupee depreciation, is expected to add exponentially to Pakistan’s external indebtedness in the days ahead.

The PTI government argues that its inheritance with respect to the foreign debt is worse than what the PML-N government faced in 2013; however, by incurring debt on a magnitude that is higher than what was procured by the PML-N and that too within the first year of its tenure when the country is facing historically high budget and current account deficits may prove to be an unwise move. A better option would be to slash current expenditure and focus more on luring foreign direct investment.

To check the trend of rising debt, the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005 was passed after a great deal of discussion in parliament; It was provided in the Act to reduce revenue deficit to nil by 30th June, 2008, and thereafter maintain a revenue surplus, and ensure in every financial year up to June, 2013, a reduction in total public debt of not less than two and a half percent of the estimated GDP. But this law was violated with impunity by successive governments. The PTI government should invoke the provisions of thies Act and take strict measures to control the flood of rising debt.