Dr. Tahseen Mahmood Aslam looks at a very difficult scenario of Pakistan’s unsustainable public debt
One crucial aspect of the economic crisis faced by Pakistan is the escalating level of Pakistan’s unsustainable public debt that is now considered unsustainable keeping in view the weak base of the country’s economy. There is an obvious connection between public debt and poverty in country like Pakistan whose economies suffer from structural deficiencies and the lack of political will to rectify them. Pakistan is rated amongst the 52 countries in grip of serious debt crisis and this problem is exacerbated by the fact that the country’s debt is leading to human rights being denied or even being put ahead of life itself. It is widely acknowledged that the most critical problem faced by the Pakistan economy is repayment and servicing of external debt and that instead of bringing economic growth, borrowing has created the need for more borrowing with an external account crisis that is deepening in the country. It is variously described that in case of Pakistan the empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential and in many cases that impact gets more pronounced as debt increases.
The most potent method of assessing the sustainability of Pakistan in terms of debt is to compare it with Sri Lanka that now has a credit rating worse than that of Pakistan. Sri Lanka was struggling in 2017 to repay its debts and for that purpose it signed a 99-year lease with a state-run Chinese company on a port it failed to honour its debt commitments and gradually slipped into fiscal and monetary anarchy that resulted in pushing the country into the minefield of default. It is reported that among countries with the debt-to-GDP ratio exceeding 80 per cent, Pakistan’s interest-to-revenue ratio is the second-highest after that of Sri Lanka. However, if Pakistan’s interest-to-revenue ratio from the federal budget is calculated using the revenue net of the provincial share, it comes out at just about 80 per cent even greater than that of Sri Lanka indicating the oncoming crisis. It is mentioned in this respect that the myth of getting relief, forgiveness or default is certainly not the solution to the debt crisis.
It is reported that Pakistan’s gross public debt was one-third external and two-thirds domestic. Domestic debt is mostly accounted for by Pakistan Investment Bonds, Treasury Bills, and the National Savings Scheme. External debt is mostly accounted for by multilateral lenders such as the World Bank, International Monetary Fund, Asian Development Bank, bilateral lenders such as Paris Club and commercial lenders. It represents a greater burden because it has to be paid in foreign exchange and the lenders are powerful entities and countries. The rupee-dollar exchange rate used in the debt bulletin as of the end June was Rs.157; now that the dollar is climbing above Rs.290, the external debt has increased. Pakistan’s debt relative to the gross domestic product (GDP) or the size of the economy has been climbing in recent years which also reflects the downturn of the economy. This impression is consolidated by the SBP figures that point out the ratio using total debt and liabilities was 100.3 per cent versus 74.9 per cent using total debt of the government.
The most crucial impact of the debt is felt by debt servicing as interest on loans is the single largest expense in every federal budget that is rated as higher than the defence budget and is certainly much higher than any expenditure on development projects that are grossly neglected. The high degree of indebtedness has made Pakistan more vulnerable to economic shocks and has weakened the country politically vis-à-vis powerful external lenders. It has also greatly reduced the country’s ability to do what is the imperative need such as investing in education and healthcare. It is therefore not surprising that Pakistan’s ranking on human development index is 154 as compared to India 131, Bangladesh 133 and Sri Lanka 72. The cost of debt repayment is largely spread over the majority that has little ability to pay. The level of debt is the main cause for the endemic poverty pervading the country that, in addition, has also given rise to unemployment and has also brought in unprecedented inflation that has become almost unbearable.
One of the main concerns of financial policy planners is to devise a strategy for arriving at a point that ensures debt sustainability. There is a great deal of concern about the level of debt as it has increased by over 28 per cent or Rs.11.3 trillion between 2021 and 2022 to Rs.51.13 trillion mainly because of policy prescriptions like devaluations and interest rate hikes, rather than additional debt inflows for economic growth. The total public debt which was Rs.39.87 trillion by end-June 2021, increased to Rs.49.19 trillion by end-June 2022 showing an increase of Rs.9.3 trillion that further rose to Rs.51.13 trillion by end-September 2022. It is pointed out in this respect that the Fiscal Responsibility & Debt Limitation Act (FRDLA) threshold was violated by a big margin. The most harmful result was the increase in the public debt to GDP ratio from 71.5 per cent of GDP in June 2021 to 73.5 per cent by end of June 2022. The per capita debt, therefore, increased from Rs.175,625 per person in June 2021 to Rs.225,247 in September 2022 showing an additional indebtedness of almost Rs.50,000 per person in just 15 months that went up by 28 per cent. One major cause of the increase in public debt was on account of exchange rate losses worth Rs.3.76 trillion followed by Rs.3.18 trillion due to an increase in interest rates and about Rs.2.43 trillion for primary deficit impact.
There are many theories prevalent about making debt sustainable but all are laden with perceptions of the lender and the debtor country and so there is bound to be stark differences between them. Influential multilateral lenders the IMF and World Bank have jointly developed a debt sustainability framework describing that public debt could be sustainable when the primary balance is needed to stabilise debt under both the baseline and realistic shock scenarios is economically and politically feasible and that the level of debt is consistent with an acceptably low rollover risk and with preserving potential growth at a satisfactory level. This description is somewhat murky as it contains terms such as politically feasible, acceptably low and satisfactory that is difficult to interpret in scenarios like Pakistan where the need for debt is fast increasing with hardly any possibility of rolling back the already considerable debt backlog.
Pakistan needs higher economic growth to alleviate poverty but again it is the constraints of overwhelming debt that stands in the way. The main problem is that the incidence and impact of public debt in Pakistan are discussed in a parlance laden with economic jargon and number crunching that is extremely confusing and makes it almost impossible to bring out a real picture of the current state of debt. The matter is generally portrayed as too abstract and complex restricting appropriate debate. This issue is usually veiled in the web of secrecy and the policy makers successfully bring to fore inflation and unemployment as the main factors of economic misery in order to highlight its main cause. TW