Public debt balloons to over Rs50 trillion in July

KARACHI: The public debt swelled 27 percent year-on-year to Rs50.5 trillion in July FY2023, latest data showed on Tuesday, mostly because of no let-up in the government’s borrowing binge to plug the budgetary hole amid lack of external assistance and rupee rout.

The debt stood at Rs39.87 trillion as of July 31, 2021. It rose by 6 percent month-on-month. The debt was Rs47.78 trillion as of June 30, 2022.

The government’s increased borrowing requirement to finance the budget deficit and lack of external assistance have led to a rise in public debt. The depreciation of the local currency against the dollar also pushed the central government debt higher.

A major portion of the debt is sourced from domestic debt, which stood at Rs31.13 trillion in July, compared with Rs26.82 trillion a year ago. The government continued to borrow from commercial banks via treasury bills and bonds to meet its funding needs as it doesn’t borrow from the central bank due to the IMF (International Monetary Fund) programme.

Dried foreign currency inflows caused by the stalled IMF bailout package also surged browning from the domestic market.

The SBP’s data showed that long-term debt rose 25 percent to Rs23.77 trillion in July. The short-term debt was Rs7.30 trillion, compared with Rs7.74 trillion by the end of July.

The permanent debt rose 25 percent to Rs20.5 trillion in July 2022 from Rs15.4 trillion in July 2021.

The central government's external debt stood at Rs19.37 trillion in July, 49 percent up from the year earlier.

The government’s debt is expected to go further in the coming months due to the economic fallout from the devastating floods in the country. This calamity will require the government to spend more on rehabilitation and infrastructure, increasing the budget deficit.

The IMF, which disbursed $1.16 billion for Pakistan last week, sees the budget deficit to clock in at 4.7 percent of the gross domestic product in FY2023. The damage caused by the floods may challenge the IMF’s projections.

Political tension led to significant fiscal slippages, according to the IMF’s country report of Pakistan issued last week.

The former government granted a 4-months “relief package” in late February 2022 in violation of its commitments to fiscal discipline made earlier in the year. The largely untargeted package reduced petrol and diesel prices (through a generous general subsidy and setting fuel taxes at zero taxation); lowered electricity tariffs for almost all households and commercial consumers; and provided tax exemptions and a tax amnesty, the IMF said.

“These measures were accompanied by the deferral of regular electricity tariff increases, as well as increases in the minimum wage and public wages and pensions, and additional food subsidies. The retention of these measures, as well as additional slippages in Q3 and Q4 widened the FY22 fiscal deficit by more than 1½ percent of GDP, missing the end-June fiscal target by a wide margin,” it said.

“The authorities’ plan to achieve a small primary surplus in FY2023 is a welcome step to reduce fiscal and external pressures and build confidence. Containing current spending and mobilising tax revenues are critical to create space for much-needed social protection and strengthen public debt sustainability,” it added.

The IMF expects public debt to fall by almost 7 percentage points of GDP to 72.1 percent of GDP at the end-FY23, against a tighter fiscal stance, and as inflation erodes the value of local currency debt. This follows an increase in the debt-to-GDP ratio from 77.9 percent at end-FY21 to 78.9 percent at end-FY22 on account of the large fiscal deficit and a depreciating exchange rate despite low real effective interest rates. Supported by the planned fiscal adjustment and robust growth, public debt is projected to follow a downward path towards 60 percent of GDP by FY27, with external debt declining toward 25 percent of GDP, according to the IMF.