Ballooning public debt

The State Bank of Pakistan (SBP) latest central government debt bulletin for the period July-February of the current fiscal year reveals that finance ministry incurred debt which was more  than it was required, abandoning the path of fiscal prudency. The SBP data shows that federal governments’ debt ballooned to Rs. 22.9 trillion by the end of February, 2018. There was net increase of Rs. 2.14 trillion in the total central governments’ debt in the first eight months of the fiscal year, which was 10.3 percent higher than that in June, 2017.

For the current fiscal year 2017-18, parliament had approved the budget deficit target of 4.1 percent of the GDP or Rs. 1.48 trillion. However, the net addition of 2.14 trillion to federal governments’ debt pushed it to 6.1 percent of the GDP. The total domestic debt increased to roughly Rs. 16 trillion, an addition of Rs.1.1 trillion or 74 percent in eight months which is really very alarming. The domestic debt structure underwent a drastic change which has already exposed the government to refinancing risks.

Like the unprecedented surge in domestic debt, foreign loan accumulation grew rapidly in 2017 as Pakistan acquired $ 6.9 billion during the year in bid to finance swelling imports and repaying external debt following failure to bridge the fiscal deficit due to low exports and insignificant increase in workers remittances. This is the single largest annual accumulation of external debt. The total amount of foreign debt is worth $ 90 billion. Despite higher repayments, the increase in external debt was largely due to $ 2.5 billion mobilized through Euro and Sukuk bonds. In addition to this, strengthening of other major currencies against the US dollar resulted in $ 666.3 million worth of revaluation losses. Especially the US dollar weekend against Euro and Special Drawing Rights (SDRs) by 4.9 percent and 2.3 percent respectively, which add significantly to the dollar value of Pakistan’s external debt.

The growing debt burden has triggered a national debate on the sustainability of country’s macro economic framework. Borrowing itself is not a bad fiscal device. It is the mode of spending that creates risks to the economy. Japan tops the list of heavily borrowing countries as its public debt stands at 253 percent of the GDP. But it borrowed heavily for heavy investment in enhancing the productive capacity of the economy to break the trap of low economic growth that continued for two decades. Greece ranks second in the list which borrowed 180 percent of the GDP. But it spent national debt lavishly on construction activities like international level sports stadiums and had to mortgage even water supply and postal services with the European banks besides reductions in pensions of pensioners and wages of employed workers.

Pakistan is 43rd in the list of borrowers but it is not in a comfort zone because of extravagant spending of debt on non-productive activities. PML-N government’s lavish spending of domestic and foreign debt on motorways, highly subsidized metro bus projects and orange train instead of building dams, modernizing the industrial base and setting up import substitution industries is bringing disaster to the economy. The motorways and metro bus service did not boost productivity in agriculture and manufacturing sectors. It did not increase exports and reduced imports. The government needed to have shown concern for steep decline in exports in proportion to GDP, rapid increase in imports and loss of completive edge of the industry. By itself debt is not a problem. What matters is the paying capacity of the economy. The problem for Pakistan is low direct tax revenues, falling exports and home remittances, and extremely low level of foreign investment. These factors make it difficult to carry even smaller level of national debt.