Debt, liabilities surge 23.5pc to Rs63.9tr in July-Dec

KARACHI: Pakistan total debt and liabilities climbed 23.5 percent to Rs63.9 trillion at the end of December 2022, taking the cash-strapped country into uncharted waters.

Overall debt and liabilities of the country had stood at Rs51.7 trillion by the end of December 2021, data from the State Bank of Pakistan (SBP) on Thursday showed.

When compared with the prior quarter, the debt and liabilities slightly increased by 2.3 percent. At the end of June 30, 2022, they were Rs59.69 trillion.

The latest numbers suggest the government fell deeper into the red with both domestic and foreign liabilities growing as the budget deficit rose and external financing remained scarce amid stalled International Monetary Fund (IMF) bailout package and a lack of inflows from other bilateral and multilateral creditors.

The SBP's statistics revealed that the nation's debt jumped 23.3 percent year over year to Rs60.7 trillion, while the liabilities were Rs3.6 trillion, up 23.1 percent from the previous year.

The government was forced to increase its borrowing from domestic and foreign sources in order to keep the economy afloat due to revenue deficits and excessive spending demands. As a result, at the end of December 2022, the nation's gross public debt increased 23.4 percent to Rs52.7 trillion. The central government’s debt rose 22.8 percent YoY to Rs51 trillion.

Total external debt and liabilities increased 24.1 percent to Rs28.6 trillion in July-December this fiscal year from Rs23 trillion a year ago.

Sana Tawfik, senior analyst and economist, Arif Habib Limited said the increase in the central government's debt could be attributed to rising deficit financing need, especially in absence of material external inflows.

“Weaker currency led to surge in external debt in Rupee terms on YoY basis. Moreover, the monthly decline in short-term debt while increment in long term Fed. Gov't Bonds show the shift of maturity profile to longer tenor while providing a breather to the government in terms of repayments. However, higher stock of debt means a higher cost of debt servicing for the government,” Tawfik added.

As domestic and international interest rates rose, interest payments on debt increased sharply. The increase in the policy rate, which currently stands at 17 percent, is what is causing a rise in interest payments on domestic debt. It elevated the government's cost of servicing its debt.

In terms of US dollars, Pakistan’s total external debt and liabilities fell to $126 billion in July-December FY2023 from $131 billion a year earlier.

Pakistan has been grappling with an economic crisis that is becoming worse. A combination of commodities headwinds and supply chain disruptions, exacerbated by the Ukraine crises, disastrous floods, and significant political instability, pose a serious threat to its finances. The country has been struggling with soaring inflation.

The rupee recently fell to historic lows after the government, in an effort to meet IMF lending conditions, lifted currency controls that had been artificially supporting the currency.

The government unveiled a bill on Wednesday to increase taxes by Rs170 billion, which was a necessary requirement to secure funding from the IMF to avert default.

Fitch Ratings Agency has recently lowered Pakistan's credit rating deeper into junk, seeing chances of default or debt restructuring.

According to SBP’s former governor Dr Muhammad Yaqub, in the case of internal debt, a country has the ability to print money to make its debt payments and avoid debt default without a relief. The country will pay a high cost through high inflation, increased poverty, the severe balance of payment difficulties, and a downward spiral of the economy. But theoretically, it can avoid internal debt default without debt restructuring or debt relief by creditors.

“In the matter of external payments, a country cannot print foreign exchange. If it gets into in an external debt trap, the country will have to borrow continuously to meet its existing debt liabilities. In other words, It will have to intensify its debt trap by more foreign borrowing but will soon reach a stage when nobody is willing to lend and the county will default in its external payments with all its consequences,” he said.

Yaqub further stated that such a country could avoid external debt default only if its external creditors were willing to restructure the existing debt giving the country debt relief for an extended period of time in which time the country restructures its economic policies to generate enough foreign exchange resources to meet its foreign exchange requirements.

“It will involve equally difficult economic policy decisions and people will face economic hardships."

Yaqub was of the view that Pakistan’s existing debt mostly consists of public debt to bilateral countries and multilateral institutions like the World Bank, IMF, Asian Development Bank, and Islamic Development Bank.

"Most of the multilateral institutions refuse to give debt relief and have made it clear that they will not restructure their debt for any country," he said.