FeaturedNationalVOLUME 17 ISSUE # 18

Rising debt burden – An unmet challenge

According to recently released official figures, foreign borrowing by the PTI government amounted to $47.55 billion in 43 months. This means that the government has been borrowing well over a billion dollars per month from foreign sources. A comparison with previous governments shows that the PTI government has contracted more external debt than its predecessors without any visible improvement in the economic condition of the common man.

The economic managers of the present government put the blame on the PPP and PML-N governments for the massive increase in the debt burden and resorted to the IMF for a bailout package. This may be partly true but the stark fact is that despite heavy borrowing, there is no corresponding increase in economic growth. The government has not only failed to fix the country’s debt problem, but has also made it significantly worse. In the first seven months of the fiscal year, the government has borrowed $12 billion, or 86% of the full-year target of $14 billion. It may be added here that the total foreign borrowing for the previous fiscal year was $14.3 billion.

An analysis of the latest figures shows that the Ministry of Economic Affairs report does not list the $1 billion tranche of the IMF loan received in February, or over $1.2 billion in foreign currency-denominated Naya Pakistan Certificates, which technically amount to foreign financing. If we add these up, total borrowing will surpass the full-year target, with more than three months still to go. Significantly, the amount of the new borrowing — $2.6 billion — is in the form of commercial loans, which have higher interest rates and collateral conditions, coupled with shorter repayment periods. The full year target for commercial loans is $4.87 billion, meaning that the government may add over $2.2 billion to foreign loans before the year-end. The government has also floated bonds with very high interest rates, which may be lucrative to investors, but will be difficult to repay if revenue growth falls below a certain level.

To put the latest debt situation in perspective, a look at the past will be in order. The total public external debt in June 2013 was $51.2 billion dollars. The PML-N government added $25.1 billion and the debt inherited by the current government was $76 billion. The present government in its first 40 months had added 26 billion to the external debt in comparison with 25 billion added by the previous government in 63 months (including the period of the interim government). The total external debt including liabilities increased by 35 billion dollars in 63 months of the previous government and by 34 billion dollars in 40 months of the current government. The exchange rate devalued by 25 rupees during the previous government. The present government added 52 rupees per dollar to the rupee-dollar parity. If we include the effect of currency devaluation in the debt statistics, we find that public external debt increased by 4.4 trillion during the PML government and by 8.5 trillion during the present government. The total external debt and liabilities increased by 5.9 trillion in the previous government and by 11.1 trillion during the current government.

The present government inherited an amount of 9.4 trillion of external debt, and today this debt stands at 18 trillion. In other words, the external debt incurred by Pakistan in its entire history is equal to the external debt added by the present government in 40 months. Over 35% contribution to this increase comes from new borrowing, as is evident from the dollar value of debt statistics and the remaining is due to currency devaluation. The domestic debt inherited by the PML-N government was 10.2 trillion rupees and it added 6.7 trillion and left an amount of 16.9 trillion for the present government. The present government added 9.8 trillion to it as a result of which the current level of domestic debt stands at 26.7 trillion. The total public debt, including the domestic and foreign debt, stood at 14 trillion when the PML-N government took charge. It added 11 trillion to it, raising it to 25 trillion. The present government added further16.5 trillion and the current level of public debt stands at 41.6 trillion.

It is clear that despite tall claims, the PTI government has signally failed to solve the debt problem. Worse, it seems to have no plan to arrest the ongoing upswing in domestic and foreign debt. Needless to say, for effective debt management, it is important to encourage foreign investment, increase exports and reduce the balance of payments deficit. A comprehensive incentives package in this regard is the need of the hour.