Spiraling debt

That Pakistan has been in a debt trap is not new information; what is new is the speed with which the PTI-led government has further ensnared Pakistan in it. In the past 18 months, Pakistan’s external debt and liabilities have increased by over Rs2,440 billion. The government’s domestic debt which was around Rs16.4 trillion in June 2019 spiraled to Rs21.6 trillion in Dec 2019, a jump of over 25 percent in just a year and a half. Total debt and liabilities, that stood at around Rs30 trillion, jumped to nearly Rs41 trillion in the same period; again an increase of over 25 percent in just 18 months. Total debt and liabilities include the sum of all domestic and external debts such as from the IMF, external liabilities, and private-sector external debt.

If you just calculate gross public debt such as both domestic and external debt including the IMF, the amount rose from Rs24.9 to Rs33.7 trillion, an increase of nearly Rs9 trillion. According to the latest official data, Pakistan’s EDL (external debt liabilities) have seen a jump to $111 billion till the end of 2019. A total of $15.8 billion were added in just 18 months from $95 billion in June 2018. The most alarming part is that the country’s debt-to-GDP ratio climbed to 94 percent in Dec 2019, whereas the IMF had recommended 78.5 percent debt-to-GDP ratio at the outset of the programme. Somehow the government has been unable to control the large fiscal deficit, though there was an effort to increase cash deposits to provide a financing cushion.

When a government decides to borrow such large sums of money, it must be sure that they can pay back or rollover the loans in medium and long term. Here are a couple of things to keep in mind while measuring risk exposure and debt sustainability. First, the total domestic and external debt as a percentage of GDP must be carefully calibrated. Then the time to maturity of new loans, which shows how soon the loans must be paid back or refinanced, must be kept in mind. And lastly, whether the loans are on fixed or floating rates makes a lot of difference. This unprecedented borrowing spree does not bode well for the economy, and any further spiral in debt may result in a complete disaster. A disaster is defined as a crisis which is beyond the government’s capacity to resolve. Before we reach that stage, perhaps a radical rethinking is needed in the way we manage our economy and finances.