Will the austerity policies of the government work? The short answer is no, as per the DG of the Debt Office who was asked by the National Assembly Standing Committee on Finance to share the government’s five-year debt management plan. In itself, the news is not a surprise. It is already known that Pakistan will need to borrow around $22 billion from external sources just this year. The trouble is that it means Pakistan’s external debt will jump 20 percent in a single year to hit $98 billion. Improvement does not seem to be on the cards. The finance division official confirmed that the government will need to continue borrowing additional funds in the next five years to keep the fiscal deficit within targets. While Pakistan will pay back almost $8 billion in debt before the end of the year, this will be offset by the much higher projected borrowing. It was clear that the medium-term debt strategy left most members of the NA standing committee unimpressed, as the DG tried to do his best to give it a positive spin.
It was claimed that significant progress will be made on strategic targets – without clarifying what those targets were, let alone why they were significant. The finance division is targeting changing the domestic-to-foreign debt ratio from the existing 66 percent to 34 percent ratio to 70:30, with the caveat that domestic debt is actually more expensive to service than foreign debt if only interest rates are taken into account. But this figure itself is irrelevant since the real projected numbers are going in the opposite direction. By 2024, Pakistan’s external debt will hit 41 percent of its total debt, while domestic debt will make up the rest. So the question is why the 70:30 figure was even mentioned. This only confirms that the so-called debt management strategy has nothing to do with the real mismanagement of the economy that has been underway.
Most external debt continues to remain multilateral or bilateral, while international capital markets and commercial bank loans make up around 27 percent. This tends to be a good sign, since the latter two tend to be more expensive than bilateral or multilateral loans. The government wants to tap international capital markets more in the future – which will not be hard given the high interest rates Pakistan continues to offer. The real challenge will be to bring the interest rates down when borrowing dollars, which is simply not happening soon. However, while the focus remains skewed towards external debt, domestic debt is a serious challenge for the government and poses major risks for the economy. The high interest rates inside Pakistan means that domestic borrowing requires the government to borrow more to pay off earlier loans. This repeat cycle is not a sustainable one. Moreover, over 55 percent of this debt offers floating interest rates, which in the current environment are spiralling upwards rather than downwards. The desire to shift to fixed interest rates is good in principle, but it would depend on Pakistan’s future fiscal policy and policy rate. The trouble is that the DG read out a list of targets before concluding that there was little chance of achieving them. This seems like a good summary of the government’s debt management strategy.