ISLAMABAD: As the government has established a high-powered inquiry commission to ascertain reasons behind surge in public debt, debt servicing has gone doubled in last two years mainly because of hike in interest rates, The News has learnt.
Debt servicing increased in the range of 70 percent mainly because of hike in interest rate by the State Bank of Pakistan (SBP) in the name of tightening of monetary policy.
According to the Ministry of Finance data, the government had originally allocated Rs1,620 billion for debt servicing on both domestic and foreign loans in last fiscal year 2018-19 which was jacked up to Rs1,987 billion in revised estimates. Now the government has earmarked Rs2,891 billion for the current fiscal year’s budget 2019-20 against initial estimates of Rs1,620 billion for 2018-19, witnessing almost doubled payment during these comparable periods.
Former finance minister and renowned economist Dr Hafeez A Pasha after conducting research on this issue came up with disclosure that hike in discount rate contributed 70 percent surge into burden of debt servicing while around 30 percent increase in debt servicing occurred because of piled up figure of public debt.
“The major reason for increasing debt servicing requirement is not overall size of the public debt, but it went up mainly because of hike in policy rate by the State Bank,” said Dr Pasha, and added that every 1 percent increase in policy rate hiked burden of public debt by Rs200 billion. He said public debt had gone up phenomenally, but there was need to analyse reasons for increasing debt servicing.
In last two years since 2017, the SBP hiked policy rate frequently and it increased from 5.75 percent to 12.25 percent through adoption of tightening of monetary policy in a bid to suppress demand in the economy.
Now the economists are criticising the policy of rampant surge into discount rate by the SBP through Monetary Policy Committee (MPC), arguing that there was no justification to hike discount rate in double digit when the CPI-based inflation was hovering around 9 percent.
Now the SBP is again going to unveil upcoming monetary policy tomorrow (Tuesday) with the expectation that the monetary policy committee may hike in discount rate.
Former secretary finance and renowned economist Dr Waqar Masood said that there was no reason for any further adjustments in the interest rates. “We already have real interest rate at more than 5 percent and adding more to it would make no economic sense as it would continue to erode profitability for investments besides adding to huge burden on fiscal side by increasing the interest expenditures,” he said.