FeaturedNationalVOLUME 19 ISSUE # 17

Rising debt burden is at the core of our economic crisis

According to the latest figures released by the State Bank of Pakistan, the government’s public debt rose by 6.6 percent to Rs64.842 trillion in the first seven months of the fiscal year ending in June. The debt increased by Rs4 trillion from July to January, as the caretaker government borrowed heavily to finance ballooning administrative expenditure and a widening budget deficit.

In January, the central government debt rose by 17.8 percent on a year-on-year basis. By the end of January 2023, the debt was Rs55.022 trillion. The State Bank of Pakistan’s data revealed that between July and January of FY2024, the domestic debt of the federal government grew by 9.8 percent to Rs42.626 trillion. As of January 2024, the debt had increased by 24.1 percent.The external debt rose to Rs22.216 trillion as of January 31, 2024, up 7.4 percent from the previous year. Foreign debt increased by 0.8 percent in July-January FY2024.

It may be added here that as per the Ministry of Finance’s monthly economic review and outlook released last month, Pakistan’s unsustainable public debt position is the primary cause of the country’s current economic difficulties. Since 2013, Pakistan has violated the Fiscal Responsibility & Debt Limitation Act (FRDL). The highest interest rates since 1972, declining state-owned enterprises’ profits, and poor tax collection all make it more difficult for the government to pay off the nation’s debt.

The expanding debt burden brought on by the enormous financing needs of the cash-strapped government is at the root of the current economic woes. A detailed analysis of available data shows that the spike in debt burden is mainly due to a rise in domestic debt — from 38.3 trillion rupees in June 2023 to 42.62 trillion rupees by January 2024 or a rise of 3.8 trillion rupees. This is because the budgeted amount of 6.1 billion dollars under the head of borrowing from the commercial sector abroad and issuance of sukuk/Eurobonds was not realised due to the three major international rating agencies leaving Pakistan’s rating unchanged in spite of the Stand-By Arrangement (SBA) loan approval by the International Monetary Fund (IMF) board in July last year and the success of the first review on 15 November 2023.

A major setback is that the caretaker government miserably failed to contain the budgeted current as indicated by the 43 percent rise in fiscal deficit in the first half of the current year compared to the same period last year as noted in the Finance Division’s February Economic Update and Outlook. The caretaker set-up also slashed development expenditure by 5.9 percent during the first half of the current year compared to the same period the year before, with negative effects on the growth rate.

As can be seen from the above analysis, financing risks remain exceptionally high due to large public-sector external rollover needs, a persistent current account deficit, a difficult external environment for Eurobond and Sukuk issuance and limited reserve buffers in case of delays to anticipated inflows.Without doubt the new government faces a formidable challenge setting things right. Due to Pakistan’s precarious external position, one of the top priorities for the new PML-N government will be obtaining funding from both bilateral and multilateral partners. As of now, the nation’s foreign exchange reserves are far less than the $25 billion in external debt payments it has to make in the next fiscal year, beginning in July.

The problem is two-fold: One is reducing the size of large, costly borrowings and the other is containing an unaffordably high budget deficit. So, how to go about it? The country’s new Prime Minister Shehbaz Sharif has given the go-ahead to expedite talks with the International Monetary Fund in the light of the impending expiration of the $3 billion loan programme in April. A final tranche of $1.1 billion is yet to be released under the current stand-by arrangement.

It is time we realized that debt unsustainability is the core of our economic woes and taking more loans to repay previous loans is no solution to the problem. But this we are continually doing and coming to grief again and again.

The long term solution lies in undertaking overdue structural reforms, including revamping of the taxation system which relies heavily on indirect taxes – to the tune of over 75 percent – whose incidence on the poor is greater than on the rich. Instead, the emphasis should be on direct taxes based on the ability to pay principle which would necessitate widening the tax net and removing all exemptions currently enjoyed by the wealthy and the powerful.

Urgent reforms needed should include raising provincial farm tax on the rich landlords, the builders, the traders, the aarhtis and enforcing professional tax in the urban areas. The objective should be to shift the burden away from the relatively poorer sections of society towards the rich and influential.The economic crisis facing us today has deepened over decades due to flawed policies of successive governments. We need to change the current mindset if we have to survive as a nation.