Debts account for 72pc of GDP: minister

ISLAMABAD: Coupled with the ballooning public debt, Pakistan economy’s “twin deficits”— fiscal and current account—are posing serious challenge to the economy. Currently, the country’s debt to GDP ratio is 72 pc which could go up to 74pc by end this fiscal year, Finance Minister Shamshad Akhtar said on Wednesday.

“To cope with these challenges, we need effective, sensible and high-powered economic management,” she said. Management of huge public debt would be a challenge for the upcoming government as it is critically linked to stability of economic growth.

Fiscal deficit and current account deficit is a challenge. “What we have to do is to really have real sector economic growth very fast, diversify our exports, get good business environment institutionally and politically, then we would be able to attract [international] inflows,” Minister for Finance, Revenue and Economic Affairs Dr Shamshad Akhtar said this at a one-day seminar titled “Public Debt-Issues, Challenges and Way Forward” here on Wednesday.

She further said that once they have high level of exports and high level of international equity inflows, the whole thing will start changing. “In Pakistan, investment to GDP has been historically very low and volatile. We need to invest in very prudent manner. We must increase investment to GDP ratio for development,” she said. She suggested that except other projects, capital projects [that maintain or improve assets, often called infrastructure projects] be given priority.

She said, “We have to have effective exchange rate and debt management. Our consumption to GDP ratio is much higher than investment to GDP ratio.” Pakistan’s problem is that it has very low domestic resource mobilization. It should go for expansion of tax net and improve tax administration.

She suggested that government has to look at fiscal consolidation [reduce deficits and accumulation of debt stock]. The increased fiscal deficit is one of the instruments for growing public debt. Pakistan fiscal deficit to GDP ratio was 4pc of the GDP for the fiscal year 2017/18 and it has to be brought down to 3.5pc by 20019/20.

Regarding the public debt, she said that Pakistan’s total public debt at end-May 2018 stood at Rs24.5 trillion, of which domestic debt was Rs16.5trillion and Rs8 trillion as external debt. The country’s external debt at end of FY2108 stood at $69.5 billion while adding other external liabilities with it, the total volume of external debt and liabilities stands at $92.2 billion at end June 2018.

The increased exchange rate also impacting the external debt and so it balloons in real terms. Currently, the country’s debt to GDP ratio is 72 pc which could go up to 74pc by end this fiscal year, said the minister. There is around 14 percentage points’ slippage from the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 that calls for limiting it below 60pc of GDP.

“Effective exchange rate management and effective fiscal deficit is the key to ultimately managing our debt situation effectively,” she said. Minister said that internationally, world economies are now moving from low interest rate to tightening of their monetary policy [high interest rates]. Same would be the response of domestic economy. So, in years and even months to come, we would be in much difficult situation with increased interest rate in international market.

Pakistani imports are high and for July-June 2017/18, it has been recorded at 52.9 billion at exports at only 20.4 billion with a historic huge trade deficit of 32.49 billion. This is unsustainable and that’s why we are facing high Current Account Deficit (CAD), she said.

The minister said that the Public debt witnessed average annual growth of 11.3pc during FY 2013 to May 2018. She informed that public debt mainly increased due to fiscal deficit, IMF loan, balance of payments requirements and rupee depreciation against the dollar.

She said that around 33 percent of total public debt is denominated in foreign currencies with an average life of around eight years. The minister further stated that during the last five years, several structural change were witnessed in the composition of external public debt with increased share of commercial borrowing; however, there is a need to reduce reliance on this source of financing. The minister suggested that government has to emphasise on obtaining concessional and long-term external financing to avoid higher debt servicing and putting in place fiscal consolidation measures by reducing fiscal deficit to below 4pc as mentioned in Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 and reducing the public debt to GDP ratio to 50 percent through increasing tax revenue and expenditure management.