Pakistan’s total debt and liabilities peaked to Rs30.8 trillion or 80.4 percent of Gross Domestic Product (GDP) at the end of September last year.
Pakistan’s total debt and liabilities peaked to Rs30.8 trillion or 80.4 percent of Gross Domestic Product (GDP) at the end of September last year.
With the mounting burden, the hydra-headed issue of debt sustainability has once again surfaced. Evident from the fact that the ministry of finance in its latest debt policy statement before the parliament has admitted the country’s debt paying capacity is down in the dumps.
There are some worrying combinations on economic front as on one side the external debt increased in recent years and on the other the foreign exchange reserves sharply eroded mainly because of widening current account deficit.
The external debt and liabilities (EDL) recorded an increase of $11.9 billion registering at $95.3 billion by end June 2018. Out of this total increase in EDL, external public debt contributed $7.7 billion. The increase in external debt and liabilities was mainly on account of burgeoning current account deficit which led to a considerable increase in external financing requirements during 2017-18.
In addition, revaluation losses on account of US dollar’s depreciation against international currencies also contributed to an increase in external public debt during 2017-18.
Pakistan’s reliance on commercial sources to finance external financing needs has relatively increased during past few years and correspondingly the floating portion of external public debt has jumped to 28 percent in 2018 from 17 percent in 2015.
The ministry of finance in its compliance report before the parliament conceded that it had breached certain targets envisaged in Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005 and failed in achieving them.
The FRDLA 2005 binds that federal government take measures to reduce federal fiscal deficit and total public debt to maintain it within prudent limits thereof.
It aims at limiting federal fiscal deficit excluding foreign grants to four percent of gross domestic product during the three years, beginning from the financial year 2017-18 and maintaining it at a maximum of three and a half percent of the gross domestic product thereafter.
The federal fiscal deficit (excluding grants) was recorded at Rs 2,243 billion or 6.5 percent of the GDP during 2017-18, thus, remained higher than the threshold of 4 percent.
Ensuring that within a period of two financial years, beginning from 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product.
Total public debt and total debt of the government as percentage of the GDP was higher than the envisaged limit of 60 percent.
On account of external debt sustainability, the report stated that country can achieve external debt sustainability if it can meet its current and future external debt service obligations, without debt rescheduling, accumulation of arrears, and without compromising growth. Strong external position of a country carries favourable market perception and creditworthiness, which invariably encourages foreign investment.
There are two principal indicators or ratios that assess the external debt sustainability. One is solvency indicators and the other liquidity indicators. Solvency indicator such as external debt-to-GDP ratio shows debt bearing capacity, while liquidity indicators such as external debt servicing to foreign exchange earnings ratio, shows debt servicing capacity of the country.
External public debt to GDP ratio grew to 24.8 percent at end June 2018 compared with 20.5 percent at end June 2017, depicting increased external debt (ED) burden.
This increase in external public debt may be attributed to net external public debt inflows as well as revaluation losses, owing to depreciation of US dollar against other international currencies. Similarly, EDL to GDP ratio increased from 27.4 percent at end of June 2017 to 33.7 percent at end of June 2018, which also accounts for increase in net private sector inflows and foreign exchange liabilities in addition to external public debt.
Some relief was realised from liquidity standpoint, where external debt servicing to foreign exchange earnings (FEE) ratio decreased to 10.8 percent in 2017-18 from 12.4 percent in 2016-17 owing to lower principal payments, while moderate growth witnessed in FEE during the year. However, relatively higher growth in external public debt stock pushed the ED/FEE ratio to 1.3 times during 2017-18 compared with 1.2 times during preceding fiscal year.
Assessment of external public debt in terms of country’s foreign exchange reserves depicts deteriorating external debt coverage as an ever-widening current account deficit continues to deplete foreign exchange reserves. During 2017-18, ED/FER was recorded at 4.3 times, registering a significant increase from 2.9 times during 2016-17.
Stagnation of exports over last few years primarily due to bottlenecks in the energy and infrastructure continue to exert pressure on the country’s liquidity situation. Exports are predominant a source of foreign exchange earnings, which, not only provide coverage towards interest servicing but also lending support towards building foreign exchange reserves up.
Over last few years, a negative trend has been observed in exports, while imports have grown significant. Although other income including workers’ remittances posted moderate growth, it could not keep pace with imports that continue to widen current account deficit and erode foreign exchange reserves. These factors contributed towards deterioration in debt bearing capacity of the country as FER to EDL ratio reduced to 17.2 percent during 2017-18 from 31.2 percent in 2015-16.
Lower growth in revenue compared to government expenditure and increased dependence on imports to meet growing domestic demand further widened twin deficits during 2017-18.
The increase in imports pushed the current account deficit to a historic high, mounting pressure on foreign exchange reserves and exchange rate.
Similarly, fiscal deficit reached its highest level during the last five years. 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 2017-18.
Without curtailing the budget and current account deficits the monster of rising debt burden cannot be controlled over the medium- to long-term. If the twin deficits remained unbridled the pace of accumulation of debt can witness new peaks in next five years.
With existing levels of widening of deficits on both internal and external fronts the fear of doubling total debt public debt and liabilities from Rs30 trillion to Rs60 trillion cannot be ruled out within next few years. Instead of celebrating transient achievements, the incumbent Pakistan Tehreek-e-Insaf-led regime will have to devise a medium- to long-term strategy to control the ballooning the debt burden.
The writer is a staff memeber
