An economy dwarfed by debt

Mehtab Haider.
August 26,2019

With the burden of total debt and liabilities mounting to Rs40.2 trillion in 2019 against Rs29.8 trillion in the same period last year, Pakistan has officially plunged into a debt trap just like it did in the decade of nineties.

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With the burden of total debt and liabilities mounting to Rs40.2 trillion in 2019 against Rs29.8 trillion in the same period last year, Pakistan has officially plunged into a debt trap just like it did in the decade of nineties.

The debt in percentage of gross domestic product (GDP) has crossed the psychological barrier of 100 percent to reach 104.3 percent. Of the total debt and liabilities standing at Rs40.2 trillion, the country’s total debt was recorded at Rs37.74 trillion including domestic debt of Rs20 trillion, Public Sector Enterprises (PSEs) at Rs1.3 trillion, external at Rs15.6 trillion -including International Monetary Fund’s (IMF) Rs921 billion. Total liabilities and services are now at Rs3.126 trillion.

Total debt and liabilities have gone up by Rs10.4 trillion in last one year of Pakistan Tehreek-e-Insaf (PTI) rule as they stood at Rs29.8 trillion in June 2018 at the end of the last government’s five year term. From 2013 to 2018, total public debt and liabilities increased from Rs14 trillion to Rs29 trillion, indicating a hike of Rs15 trillion.

However, just in one year of the PTI rule total debt and liabilities surged by Rs10.4 trillion. So the debt has been increasing exponentially at a breakneck speed. If this pace continued then the total debt and liabilities might cross Rs80-trillion-mark over the next four years.

The overall size of total debt and liabilities indicates the debt burden dwarfs the economy of Pakistan. The country, under the leadership of Prime Minister Imran Khan has virtually fallen into a terrible debt trap as it was witnessed in the 90s.

The debt to GDP ratio was over 100 percent and when former military ruler Gen (Retd) Pervez Musharraf took over reins of power he had to establish Debt Committee under supervision of Dr Pervez Hassan to come up prescription of debt sustainability. Following Dr Hassan’s report, Musharraf regime established a Debt Policy Coordination Office (DPCO) in the Ministry of Finance.

First of all, there is a need of ensuring coordination among all ministries including Ministry of Finance, Economic Affairs Division, DPCO and State Bank of Pakistan. The DPCO must be assigned to evolve consensus on single definition of public debt in line with international standards because at the moment variety of definitions are in place whereby everyone uses a definition which suits him/her.

The IMF in its report highlighted that public and external debt sustainability debt is at the limit of sustainability and subject to high uncertainty, but strong fiscal adjustment in the program and firm commitments from major bilateral official lenders to maintain their exposure well beyond the program period mitigate risks, therefore debt is judged sustainable.

“Public debt-to-GDP ratio remains high, with government and government-guaranteed debt. Public debt will only be sustainable with full implementation of the adjustment program under the IMF,” argued the Fund and took stance that a strong fiscal consolidation of 4½ percent of the GDP in primary balance over four years and a recovery in growth supported by structural reforms will help public debt decrease to around 67 percent of GDP by FY2024.

However, there is a need for an in-depth analysis on fiscal situation as the IMF program had already started whereby the basis of all the projections was dashed to the ground. How the government will recoup with the situation if the primary balance is unknown because it was projected on the eve of the staff-level agreement and the primary deficit would be slashed down from 1.8 percent in 2018-19 to 0.6 percent of GDP in 2019-20. However the primary balance is now estimated to escalate to 3.5 percent of the GDP. How will it be reduced so drastically? That will be a hundred million dollar question.

On the other side the IMF argues that the re-profiling of central bank holdings of government debt will also help render gross financing needs more manageable. External debt-to-GDP is projected to steadily decline after peaking in FY2021 due to smaller current account deficits, capital inflows, and flexible market-determined exchange rates.

Importantly, the large gross financing needs are partly driven by the continuous rollover of claims to non-traditional bilateral official creditors. Given these creditors’ firm commitments to maintain their exposure, the underlying gross external financing needs can be estimated to be lower by 1.3 percentage points of GDP on average per year during the program and beyond the program period.

Nonetheless, the IMF concedes that adverse shocks, notably to the primary balance, economic growth, and the real interest rate, could threaten debt sustainability.

Pakistan’s government and government-guaranteed debt has been on an increasing path since 2017. Public debt increased to 75.3 percent of GDP by the end of FY2018, up from 70 percent of GDP in the previous fiscal year, while public debt excluding guarantees reached about 72 percent of GDP. Net public debt also increased to around 67 percent of the GDP. Gross financing needs reached almost 34 percent of GDP, up from 29.4 percent a year ago. The annual increase in short-term public debt has surpassed the upper risk-assessment benchmark as shown in the heat map. The adjustment scenario envisages a re-profiling of the short-term debt held by the central bank, discontinuation of central bank financing, and a gradual decrease of foreign currency-denominated debt to reduce rollover and exchange rate risks.

Strong fiscal consolidation is required to restore public debt sustainability and support adjustment in the balance of payments. The IMF staff recommends an adjustment of 4.4 percent of GDP in primary fiscal balance over four years starting from FY2020, together with an end to currency intervention. Front-loaded and revenue-based fiscal consolidation measures of 4.8 percent of GDP.

Lower growth in revenue compared to government expenditure and increased dependence on imports to meet growing domestic demand led to widening of twin deficits during last couple of years. The compression in imports helped to curtail the current account deficit by around $6 billion. However, fiscal deficit is all set to touch historic levels.

These developments contributed towards higher debt burden of the country. Accordingly, the government could not fully comply with the provisions of FRDL Act 2005 in 2018-19.

Without curtailing the twin deficits such as the budget deficit and current account deficit the monster of rising debt burden cannot be controlled over the medium to long term period. If the twin deficits remained unbridled then the pace of accumulation of debt can witness new peaks in next five years period.

With existing levels of widening of deficits especially on account of highest ever budget deficit, the fear of doubling total debt public debt and liabilities from Rs40 trillion to Rs80 trillion cannot be ruled out within next few years.

Pakistan needs medium to long term debt sustainability strategy otherwise the next government will have to form new inquiry commission to ascertain reasons why the debt and liabilities had more than doubled in such a short span.

The writer is a staff member


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