NationalVOLUME 15 ISSUE # 11

Pakistan’s unsustainable debt policy

The last 10 years have seen a steep deterioration in Pakistan’s debt sustainability. In principle, there is nothing wrong for a country to borrow to achieve a higher rate of growth. All economies in the world, from the most advanced industrial economies, like the United States and Japan, to those endowed with vast natural resources, like Saudi Arabia and Venezuela, borrow money. What matters is how the borrowed money is used.

Prudent nations carefully plan and calibrate their borrowing policy in order to minimise the risks associated with taking on additional debt. A country’s policymakers must make it sure that they can pay back or roll over these loans in the medium to long-term. Economic analysts, central bankers and government policymakers rely on various indicators to measure risk exposure and debt sustainability. Examples of the indicators are: Total government external debt as a percentage of GDP, which essentially shows how much a government owes to international creditors as a percentage of the annual output of the economy. The time to the maturity of new loans, which shows how soon the loans must be paid back or refinanced. And whether the loans are on fixed or floating interest rates.

It is a matter of concern that from 2008 to 2018, Pakistan’s position worsened across all the indicators, and little to no effort was made by the PPP and PML-N governments to sustainably deal with the country’s dependence on loans and bailouts. When the PPP came to power, Pakistan was facing economic, security and political crises all at the same time. Power shortages were the norm, inflation consistently hovered over 10 per cent per year and oil had crossed $140 in international markets.

Faced with a multi-faceted crisis and lack of domestic resources in the form of taxes, the PPP entered into an IMF programme. From 2008 to 2013, the total government debt increased by over 135pc, going from Rs6,435 billion to Rs15,096 billion. As a percentage of the GDP, the total government debt increased by 4.4 percentage points, going from 62.8pc to 67.2pc during the period. But much of it was due to the prevalent economic conditions around the world, where the Great Recession significantly reduced the ability of economies, like Pakistan, to borrow money from the international bond market.

The total government external debt increased by only 22pc between 2008 and 2013, going from $42.8 billion to $52.4 billion. The result was that the GDP growth outpaced the growth in external debt, leading the total external debt to decline from 29.5pc of the GDP to 23.4pc, a reduction of 6.1 percentage points. The lack of liquidity in the international bond market meant that the PPP relied on domestic borrowing to meet its financing needs. It led the total government domestic debt to increase from Rs3,412 billion in 2008 to Rs9,833 billion in 2013, a jump of 188pc. The total government domestic debt went from 33.3pc of the GDP in 2008 to 43.8pc in 2013, an increase of 10.5 percentage points. By 2013, domestic debt represented two-thirds of Pakistan’s total government debt, which entailed “significant risks to Pakistan’s fiscal and debt outlook”, according to the SBP.

The PML-N took over the reins of the economy in 2013 and, like the PPP, it sought a bailout from the IMF. But while growth returned, and some issues were solved, the PML-N also failed to effectively deal with Pakistan’s debt crisis. It faced issues, like chronic power shortages, lack of sufficient financial resources, oil prices that remained high at over $100 a barrel and the rate of inflation hovering around 10pc per year.

Two things, however, worked greatly in its favour: By 2015, international oil prices had fallen dramatically, going below $50 a barrel. Secondly, at that time, the world was awash in liquidity as record-low interest rates and quantitative easing (essentially the printing of money) in the US, Europe and Japan led to a reach for yield in the international bond market. It meant that countries, like Pakistan, could borrow money at low interest rates.

From 2013 to 2018, the total government debt had increased by another 79pc to Rs26,968 billion. The total debt as a percentage of the GDP in the period increased by 11.2 percentage points, going from 67.2pc of the GDP to 78.4pc. In addition, the massive rollout of the China-Pakistan Economic Corridor (CPEC) led the total government external debt to increase by 46pc to $76.3 billion by 2018.

The borrowing outpaced GDP growth, leading the total government external debt to increase to 27.6pc of the GDP, a 4.2 percentage point increase from 2013. The PML-N’s appetite for debt was not satiated by foreign debt alone, and the government continued to rely on domestic debt as well, with the total government domestic debt increasing by 78pc to Rs17,483 billion by 2018. As a percentage of the GDP, the total government domestic debt increased by 7.1 percentage points to 50.8pc of the GDP. Macroeconomic imbalances and a twin current and fiscal account deficit, according to the SBP, “quickened the pace of debt accumulation.”

While the SBP 2012-13 report warned that the short-term nature of domestic debt had raised interest rate risks, the 2017-18 report pointed out that the newly issued external loans were on floating interest rates, which “might pose challenges for future debt servicing” as global interest rates rose. Needless to say, Pakistan’s borrowing policy over the last decade has brought the country to the brink. If the PTI continues to tread the same path, the debt situation will become unsustainable sooner than later.