Rising debt

The spiralling national debt has been a subject of much debate in the past few weeks. Just a few days back, Finance Minister Ishaq Dar wrote to the World Bank for the approval of another $300 million loan for the country. The government has pointed to the fulfilment of World Bank conditions as the basis for the loan, but the decision will raise questions once again about Dar’s claims that Pakistan’s era of debt-dependency was over after the last IMF tranche was received last year. It was only last month that Dar had defended the PML-N government’s debt management, pointing to risk versus cost calculations and insisting that the government was still committed to the 60 percent debt-to-GDP ratio it has pledged to maintain. The reality, however, is that the government is being criticised for failing to meet its own targets. Pakistan’s total debt burden has gone above Rs19.7 trillion while its debt-to-GDP ratio is 67 percent. Under the current government, net debt has gone up by 35 percent. Domestic debt is around 66 percent of the figure while 34 percent of the amount is foreign debt. Although revenue collection has improved and economic stability has begun to return to the country, there is some justifiable scepticism on whether the government is meeting its claims of financial frugality.

What is essential is for us to be able to sustain economic growth. Unfortunately, some of the logic offered by the finance ministry just ends up making things seem even more complicated. Has the debt increased to reduce the fiscal deficit, build a buffer against exchange rate volatility or finance development projects? The first of these reasons is rather retrogressive, and if it is indeed the main reason, there can be nothing but trouble ahead. GDP growth remains below five percent but debt has continued to grow by around seven percent. With the CPEC funding set to pile more debt into the economy, Planning Minister Ahsan Iqbal has defended the rising debt by claiming that the investment in energy and infrastructure would spur higher economic growth. The bulk of Pakistan’s budget is still spent on debt servicing – and rising debt would only mean this amount is set to increase. It is also important to remember that, as public debt has increased, private lending has fallen. This indicates that our public spending priorities remain misplaced. There has been little increase in the much-promised private-sector investment. It is okay for the government to claim all is well but Dar and his team would be wise to take the concerns over Pakistan’s rising debt seriously.