High debt-to-GDP ratio: Pakistan vulnerable to macro-fiscal shocks, WB warns

ISLAMABAD: The World Bank has warned that Pakistan’s high debt-to-GDP ratio makes it vulnerable to macro-fiscal shocks.

The World Bank Report on Pakistan Public Expenditure, Review 2023, released on Thursday stated that the Debt Sustainability Analysis (DSA) projections show that the debt stock is expected to remain above the Fiscal Responsibility and Debt Limitation Act (FRDLA) threshold in the medium term under all scenarios examined.

Therefore, Pakistan’s fiscal authority has no margin to run large fiscal deficits, as this can drive up public debt to unsustainable levels.

The DSA also reveals that Pakistan’s public debt stock is vulnerable to exchange rate shocks.

Given Pakistan’s volatile macroeconomic environment, these shocks not only drive up the public debt levels but also constrain fiscal space by increasing debt servicing costs.

The WB says Pakistan’s Public and Publicly Guaranteed Debt (PPGD) stock is high and still growing. The public debt stock, including guaranteed debt, reached 78.0 percent of GDP at the end of FY22, increasing from 58.6 percent of GDP at end-FY10.

The debt levels breached Pakistan’s Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005, 17 which requires public debt to be at most 60 percent of GDP at the end of FY23. As a result of the large debt stock, interest payments at 4.7 percent of GDP account for over one-third of its total federal expenditure in FY22. When compared across the region for the past 10 years, the country’s average public debt share was higher than the regional average.