KARACHI: Pakistan is likely to hit a macroeconomic crisis if much-needed fiscal reforms are not implemented, according to a State Bank of Pakistan (SBP) report.
Early warning indicators specific to the fiscal and debt sustainability of the country present a gloomy picture, the SBP report said, citing a survey conducted on advanced and emerging countries.
The survey, which said domestic debt accounted for almost two-thirds of total public debt for a sample of 64 emerging and advanced countries during the period 1914-2007, advocated stringent fiscal discipline to avoid sovereign defaults on domestic debt.
Pakistan’s fiscal deficit is above the threshold level and the servicing of public debt eats a significant chunk of growing revenue shares when compared to a benchmark level set by international institutions.
According to the benchmark, the fiscal deficit should hold at 3 percent of the gross domestic product, while Pakistan’s budget deficit stood at 8.6 percent of GDP in the fiscal year 2011-2012. Meanwhile, the ratio of public debt servicing to government revenues should hold at 15 percent, while Pakistan sharply breached this benchmark to reach 45 percent during the same fiscal year.
Furthermore, the ratio of public domestic debt to government revenues should hold at 200 percent, while Pakistan’s stood at 275 percent. Finally, domestic debt, calculated as banks’ and other depository institution’s claims on the government, is also above the benchmark in Pakistan. Excessive reliance on the banking system for budgetary borrowing has reached the level where the growth distorting effects of domestic debt in the form of crowding out of private sector, debt sustainability issues and inflation start to emerge, the report notes. A sharp increase in the fiscal deficit, coupled with the unavailability of external financing, has led to a rising domestic debt burden over the past few years.
In particular, the share of domestic debt in total public debt has risen from 49.3 percent in FY09 to 59.1 percent in FY12.