FeaturedNationalVOLUME 19 ISSUE # 12

Unveiling fiscal imbalances

The economic landscape of Pakistan is marred by a concerning revelation, as an official document exposes the federal government’s staggering debt burden, exceeding the statutory limit by Rs14.5 trillion. This breach, accompanied by a flawed implementation of debt management strategies, unfolds a tale of persistent violations of the Fiscal Responsibility and Debt Limitation Act. Despite successive amendments, the act has failed to deter governments from straying into unsustainable debt practices.

A recently released official document discloses that the federal government is grappling with a debt burden exceeding Rs14.5 trillion, surpassing the statutory limit set by Parliament and indicating a flawed implementation of the debt management strategy. The Ministry of Finance’s skewed Debt Policy Statement for 2024 reveals that, during the fiscal year 2022-23, the government breached the Fiscal Responsibility and Debt Limitation Act while failing to execute the Medium-Term Debt Management Strategy.

Despite the legal obligation of the Ministry of Finance to prepare this statement annually, critical information is being omitted from the report, compromising transparency, particularly in light of the rapid deterioration of the country’s debt situation. In comparison to the previous statement, the finance ministry has excluded details regarding the review of public debt, analysis of external public debt inflows and outflows, currency movement and revaluation impact, gross financing needs, and recent updates and developments.

While the finance minister publicly acknowledges Pakistan’s unsustainable debt and the International Monetary Fund points to a narrowed path to debt sustainability, the report intended for the federal cabinet and the country’s parliament conceals crucial information.

The Debt Policy Statement assesses the federal government’s debt policies against principles of sound fiscal and debt management, as well as the debt reduction path. According to the report, “Pakistan’s Debt to GDP ratio stood at 74.8% at the end of June 2023 compared with 73.9% a year earlier.” The Ministry of Finance was legally required to maintain this ratio at 57.5% of GDP, exceeding it by an alarming margin of 17.3% of GDP or Rs14.5 trillion.

With the debt burden exceeding Rs14.5 trillion, reaching Rs62.9 trillion, the country essentially has nothing left after covering the cost of interest on the total debt burden. According to the law, the debt burden should not have exceeded Rs48.5 trillion. In the first half of the current fiscal year, the government paid Rs4.22 trillion in debt servicing costs, surpassing the Centre’s net income of Rs4 trillion, as reported by the finance ministry.

The report highlights that the total public debt reached Rs62.9 trillion at the end of June 2023, with domestic debt at Rs38.8 trillion and external debt at Rs24.1 trillion. The finance ministry attributes the increase in total public debt to higher government borrowing needs for financing the federal fiscal deficit and the depreciation of the Pakistani rupee against the US dollar.

As of end-June 2023, the external public debt amounted to $84 billion, showing a net reduction of approximately $4.8 billion during the year due to the suspension of foreign loans following disruptions in Pak-IMF relations. The government repaid international commercial bank loans totaling $5.9 billion in the previous fiscal year, while inflows from international commercial banks, mainly representing refinancing of maturities, reached $3.5 billion. Additionally, the government repaid international Sukuk amounting to $1 billion.

In the face of these challenges, successive governments have consistently violated the Fiscal Responsibility and Debt Limitation (FRDL) Act, which has undergone multiple amendments. There has been a lack of emphasis on addressing the underlying reasons contributing to the escalating public debt.

According to the report, the finance ministry fell short in ensuring the country’s debt sustainability by neglecting to mitigate currency risks, refinancing risks, and interest rate risks. The proportion of external debt in the total public debt rose from 37% in the previous fiscal year to 38% in the last year, heightening currency risks amid a depreciating rupee and reluctance from foreign countries to extend loans.

The Debt Policy Statement indicated a significant deterioration in the average time of maturity of domestic loans, decreasing from three and a half years to 2 years and 8 months. This heightened risk and left the country reliant on commercial banks exploiting the situation. Despite the shortened debt maturity, the finance ministry chose to omit information on gross financing needs from the Debt Policy Statement.

The finance ministry attributed pressure on domestic market borrowing to lower-than-budgeted external inflows. Additionally, the prevailing high-interest rate environment has increased demand for short-to-medium tenor debt instruments in the domestic market. As a result, the average time to maturity of domestic debt decreased, falling below the minimum threshold of 3 years as outlined in the report.

The report also unveiled that the average time of maturity of external debt slightly increased from six years and two months to six years and four months. This improvement was primarily driven by the retirement of short-term commercial loans, realization of new external inflows at a longer tenor, and the running-off of the external debt portfolio.

Furthermore, the percentage of fixed-rate debt decreased from 26% to 20.4%, elevating interest rate risks and approaching the minimum level of 20%. However, the government successfully met its target of increasing the share of Islamic finance from 8.6% of domestic debt to 9.1%, surpassing the set goal.

In conclusion, the unveiled insights into Pakistan’s escalating debt scenario paint a picture of fiscal mismanagement and systemic shortcomings. The failure to address underlying issues, such as currency risks, refinancing challenges, and interest rate vulnerabilities, has left the country in a precarious financial position. The government’s disregard for maintaining the required debt-to-GDP ratio and the alarming breach of statutory debt limits pose significant threats to the nation’s economic well-being. Urgent and decisive measures are imperative to rectify these fiscal imbalances, ensuring a sustainable and resilient financial future for Pakistan.