IMF forecasts downward trend in public debt

ISLAMABAD: Pakistan’s public debt will come down to 55.2 percent of GDP in 2021 from the current 64.9 percent as the country’s debt dynamics improved during the past few years, the International Monetary Fund (IMF) said. 

The Fund’s forecast was contrary to the belief of several independent economists who are projecting rising trends, especially in external debt.

The IMF, however, cautioned that the dynamics “remain vulnerable to shocks.”

The Fund, in its public and external debt sustainability analysis, said the high gross-financing needs are a source of significant fragility.

“Fiscal consolidation under the IMF program is the key driver of improvements in debt dynamics,” it advised. “Fiscal adjustment not only improves the debt ratio under the baseline scenario, but the declining trend is quite resilient to standard size shocks envisaged in the debt sustainability analysis.”

The analysis said debt would stabilise even under significant shocks, “and it is only when one restricts the distribution of positive shocks to the primary balance that the public debt-to-GDP ratio trends up under strong shocks.”

It said the country’s gross financing needs are high and sensitive to shocks.

The analysis said the gross financing needs indicators reflect the relatively large share of national savings schemes which, given their diversified base, might have a smaller rollover risk.

“While the consolidation will ameliorate this risk, a more significant improvement in the debt profile will require longer-term fiscal consolidation efforts,” it said.

The analysis said the projected path for external debt is sustainable. 

“Gross external debt as a percentage of GDP has been on a declining trend—reaching 24.4 percent in 2015—and is expected to see a continued modest decline over the medium term,” it said. “This is consistent with relatively stable gross financing needs, which are expected to peak at 2.6 percent of GDP.”

Bound and stress tests suggested that the external debt-to-GDP ratio is resilient to adverse shocks.

“While sensitive to growth and exchange rate shocks, the external debt ratio would not exceed 37 percent of GDP under any scenario,” said the IMF.

It said this downward path, however, is conditional on continued fiscal consolidation and structural reforms over the medium-term. 

“High gross financing needs and reliance on short-term borrowing keep public debt dynamics vulnerable to shocks, and this fragility, while ameliorated by a captive domestic investor base and the Fund-supported program, will likely remain in the foreseeable future,” it added.

Prior to the recent Fund-supported economic stabilisation program, the IMF said Pakistan’s debt-to-GDP ratio was on an upward trend as a result of large fiscal deficits, although debt dynamics benefited from low effective real interest rates provided by the central bank’s financing.

However, significant fiscal consolidation — lowering the budget deficit from 8.9 percent of GDP in FY2011/12 to 5.4 percent in FY2014/15 — has helped reverse this adverse trend, it added. 

The coverage used for public debt includes federal and provincial governments, but does not include state-owned enterprises (SOEs). 

Consequently, government guarantees and circular debt among energy SOEs represent contingent liabilities, amounting to 2.3 percent and 0.8 percent of GDP, respectively.

The IMF said domestic funding remains reliant on short-term instruments, “but active debt management has improved the maturity profile.” 

“The share of short-term domestic debt (less than one year) remains close to 50 percent, albeit declining significantly from 64 percent in 2013, as the authorities have extended the yield curve and made improvements in debt management,” it said.