Indebtedness

We want to leavePakistan for the next generations with sustainable debt burden, thus ensuring future prosperity and sovereignty of the nation.

This appears to be a noble goal. However, the recent debt trajectory gives little comfort in this regard. The declining debt measures and growing borrowing needs have many a policymaker at a more-than-usual unease.

Let’s scan four key debt sustainability measures to set the stage for an informed discussion. A universally acceptable measure of debt sustainability, ‘public debt-to-GDP’ ratio increased to 87.2 percent in FY20 from 72.1 percent in FY18. A 15.1 percentage point growth in two years appears a quantum leap considering a more muted growth of 15.3 percent for over a period of ten years leading up to FY18.

‘Debt service-to-revenue’ ratio has deteriorated from 37.3 percent in FY18 to a massive 62.5 percent in FY 19 and 63.5 percent in FY20. ‘Debt service-to-GDP’ has almost doubled in two years – from 5.6 percent in FY18 to 7.9 percent in FY19 and to a colossal 10.3 percent in FY20. In “absolute terms” foreign debt has risen by 52 percent in two years – from Rs7.79 trillion in June 2018 to Rs11.82 trillion by June 2020 whereas domestic debt has risen by 41.4 percent from Rs16.4 trillion to Rs23.2 trillion in the same period. Debt growth and worsening debt servicing measures present a real and present concern to the macro-economic stability of the country.

It is imperative to do a quick diagnostic of the causes of a whopping Rs11,802 billion added to public debt in last two fiscal years. The country borrowed cumulatively Rs6,820 billion to fund fiscal deficits of Rs3,444 billion in FY19 and Rs3,376 billion in FY20. An additional Rs927 billion of policy induced borrowing was done to maintain a higher cash balance required for cash management, as the government adhered to zero borrowing from the State Bank of Pakistan. The remainder increase in public debt is largely attributable to a sharp depreciation of the rupee against the US dollar. Let us be certain: debt sustainability requires an aggressive framework to allay our fears of a debt-trap.

Pakistan’s economy needs to outgrow the debt that the federal government has built-up is like stating the obvious. But since growth has faltered to merely 1.9 percent in FY19 and to a negative in FY20, stating the obvious is anything but necessary. Prudent revision of course is to move away from an over-emphasis on stabilization focused on curtailing current account. Notably, the decline in current account is due to slowing imports. Nothing is more growth supportive than to help businesses expand, invest, innovate and hire people.

Fiscal consolidation from running over 8 percent of deficits is like sewing a bleeding wound. The last two fiscal years have seen a cumulative tax shortfall of Rs2,000 billion from budgeted amount, adding an approximate 5 percent in debt-to-GDP ratio. Revenue shortfall is potentially debilitating financial viability and any debt reduction plan. The expenditure side of the country’s balance sheet can be handled with improved budgetary planning, expenditure reform especially on pensions, interest payments and development spending. Subsidies and grants are easier to criticize, but constitute a minor share in overall expenditures.

The borrowing side can surely have a more qualitative treatment. Shorter term (3 to 12 months) loans at higher rates are unadvisable. The recent borrowing of around $3 billion with a rate as high as 13.25 percent and a sweetener of special dispensation of only 10 percent full and final tax liability can be dealt differently. Share of commercial loans has increased to 14 percent as of December 30, 2019 and needs a reconsideration as these loans are short tenor and expensive. They can be replaced at more competitive rates with longer-term Eurobonds, Pakistan International Sukuk and Panda Bonds.

It may have been wise to tap the international market after the IMF agreement but the government chose to rely on shorter-term high rate borrowing. The development needs of the country should only be filled with longer-term, low cost bilateral and multilateral debt. Other technical issues of lengthening the term can be reconsidered as around 30 percent of borrowing has been done on long-term PIBs fixed during peaking of policy rate to 13.25 percent. This may ease interest payments and create fiscal space for the government.

If ever there has been a time for government machinery to be indiscriminate in recovery of outstanding monies owed to the state, it is now. These include PTCL privatization proceeds $800 million due for two decades, power sector recoverable of $13 billion or Rs1,178 billion and additional billions stuck in courts as tax payments. Ninety percent of the recovery can be used to pay for debt reduction and 10 percent for poverty alleviation as mandated by debt law.

We could have fast-tracked state-of-the-art privatization of energy and aviation assets with a doable target of $5 billion to $10 billion much earlier – but then it's never too late. This will help bring down the debt stock of the country and consequently reduce the mark-up burden in the budget as well as put the debt cycle on a virtuous path.

The funding of key commercial entities of the government – NHA, Railways, Wapda, NTDC and DISCOs – can be gradually taken of the development budget. This will have multiple benefits including fiscal consolidation, slow debt build-up and incentivize a stronger commercial orientation of the entities. The approved development projects of the federal government of approximately Rs5 trillion may be rationalized by abolishing low priority projects. Transferring a percentage of costs of certain development projects to relevant provinces is also worth considering.

All the above steps are crucial and limited success is hardly an option. Debt distress can steadily dissipate with an aggressive strategy, time-bound actions, and steadfast implementation. Once we turn course, we will hopefully inch to making future generations indebtedness sustainable.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

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