FeaturedNationalVOLUME 15 ISSUE # 19

Pakistan’s snowballing debt

Pakistan’s public debt has risen by Rs2.3 trillion in the first nine months of the current fiscal year as the gap between its budget financing needs and revenue shortfall continues to widen. It stood at Rs34.1 trillion at the end of March 2020, up by 7.4pc from Rs31.7 trillion by the end of June 2019. The coronavirus threatens to exacerbate the country’s debt crisis as it needs funds to fight the pandemic, address hunger and provide relief packages to the poor and unemployed.

Pakistan’s general government debt is forecast to rise to around 87pc of the GDP by June 2020, from around 83pc in June 2019 and the fiscal deficit is expected to increase to 9.5-10pc of the GDP. Weaker tax revenues and higher interest payments incurred by the government amid tight monetary policy also led to the surge in domestic debt. Domestic debt was Rs22.4 trillion at the end of March, 8.422pc more from Rs20.731 trillion in June last year. Foreign debt rose by 5.45pc to Rs11.658 trillion, according to the State Bank of Pakistan. External debt increased on account of fresh borrowing from multilateral and commercial sources and a fall in the rupee value contributed to it.

According to government’s own estimates, the fiscal deficit could surge to 9pc of the GDP while it is certain to miss the tax revenue target which has been revised downward to Rs3.9 trillion. The International Monetary Fund (IMF) has forecast the country’s public finances to come under significant pressure. The primary deficit is expected to deteriorate to 2.9pc of the GDP in FY 2020, from 0.8pc expected earlier, due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline, and the needed higher spending to support the health response, social safety nets for the poor and unemployed. “Pakistan’s public debt is assessed to be sustainable, but risks have increased. The Covid-19 shock will unfortunately reverse the decline in public debt in recent months on the back of the authorities’ fiscal consolidation efforts,” it said in a recent report.

A drop in domestic consumption, halt in tourism – whose share in the GDP stands at 2pc – and sluggish exports would fuel a “moderate recession” in the economy, Moody’s Investors Service – one of the top three global credit rating agencies – has said. Pakistan’s growing need for funds to finance the fight against the health crisis, address hunger and relief packages announced to support industries, construction sector and daily-wage earners during the lockdown would increase its fiscal deficit to 9.5-10pc of the GDP, it forecast. “We expect that Pakistan’s financing needs will rise because of coronavirus-related economic effects and the government’s Rs1.2-trillion ($7 billion, 2.7pc of the GDP) stimulus package, approved on March 30,” it noted.

The global rating agency said the deficit would surge despite strong growth in revenue collection, which narrowed the deficit in first half (Jul-Dec 2019) of the current fiscal year. Government’s revenue in the first half rose almost 40pc from a year earlier, with tax revenue up 18pc and non-tax revenue more than doubling in part because of higher profit from the central bank. “We expect that general government debt will rise to around 87pc of the GDP by June 2020, from around 83pc in June 2019, and gradually decline in subsequent years. In fiscal 2021, we expect the deficit to narrow given the government’s commitment to fiscal consolidation under its IMF programme, but remain wide at 8-8.5pc of the GDP,” it said.

In view of the pandemic, Pakistan’s GDP is going to contract by 1.6pc in the ongoing fiscal 2019-20 and will grow to 2.9pc in the next financial year 2020-21, the UK-based Economist Intelligence Unit (EIU) said in its latest report. The current account will remain in deficit in 2020-24. The rupee will depreciate against the US dollar by Rs17.7 from an annual average of Rs160.8: US$1 in 2020 to Rs178.5: US$1 in 2024. Overseas workers’ remittances will fall sharply in 2020 owing to the pandemic-induced global economic slowdown. The unemployment rate is projected to increase from 3.9pc to 14.7pc in FY2019-2020 from 10.8 in 2018-19. A think tank of Pakistan has painted even a gloomier picture. In a worst-case scenario, experts at Lahore School of Economics (LSE) have estimated that Pakistan may post a GDP loss of 5.5pc, if the lockdown continues for nine months. Utilising a general equilibrium macro model, they found that as a result of a three-month lockdown (March to May), Pakistan’s GDP growth may contract by 2.9pc in 2020.

Pakistan’s debt crisis will worsen after the government’s increasing liabilities after the onset of Covid-19 and a steep reduction in revenues. It may force the government to borrow more. The PTI government has already received record loans in one year in Pakistan’s history. The $16 billion worth of foreign loans obtained during fiscal year 2018-19 included 11 months of the PTI government, according to official documents. Out of the $16 billion, the PTI government took $13.6 billion loans – the highest ever by any government in a single year. The remaining $2.4 billion had been received in July 2018, during the tenure of the caretaker setup. Loans of $16 billion in FY19 were the highest ever external borrowing in a fiscal year since Pakistan’s creation. This is the third time in Pakistan’s history that a government has taken over $10 billion in fresh foreign loans in a single year. The $16 billion in loans were 71pc or $6.7 billion higher than the government’s own estimates. According to the government, the loans aimed at avoiding default on international debt obligations and financing its imports.

The PML-N had added Rs15 trillion to public debt and liabilities in five years, while the PTI increased total debt and liabilities by Rs11 trillion in one year. More than 80pc loan was piled up by the PTI in one year in comparison with five years of the PML-N. However, the government has retired record foreign loans worth $9.5 billion in the last fiscal year, which is also unprecedented in Pakistan’s history.

Though the IMF and Moody’s have forecast Pakistan’s external debt-to-GDP rate to steadily decline after peaking in FY-2021 due to smaller current account deficits, capital inflows, and flexible market-determined exchange rates, yet the pandemic could prove more harmful than feared in terms of financial costs.