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Pakistan's debt addiction
Publication Date : 04-03-2014
The story of a nation living beyond its means continues unabated. Since June 2008, Pakistan’s debt and liabilities have risen much faster than total revenues and the growth rate of gross domestic product.
According to the State Bank of Pakistan, the country’s total public debt and liabilities reached 17.251 trillion Pakistani rupees (US$162 billion) as on December 31, 2013, or 70.5 per cent of GDP — substantially higher than the limit of 60 per cent of GDP set by the parliament.
This means that debt and liabilities increased by 186 per cent since June 2008, when they stood at about 6.05 trillion rupees. In comparison, total revenues lagged far behind and grew by about 99 per cent, from 1.5 trillion rupees in June 2008 to 2.98 trillion rupees in June 2013. During the same period, the size of the national economy (GDP) grew by 138 per cent, from 10.243 trillion rupees to 24.455 trillion rupees.
Without taking into consideration the liabilities, the country’s total debt stood at 16.623 trillion rupees — showing a year-on-year growth of 14.1 per cent over last year — or at 68 per cent of GDP, again well above the 60 per cent threshold.
Central bank data suggest that the government’s domestic debt rose from 9.52 trillion rupees at the end of fiscal year 2013 to 10.23 trillion rupees by Dec 31, 2013, while its external debt increased from 5.7 trillion rupees in June 2013 to 6.03 trillion rupees by end-December.
The central bank said the servicing of debt and liabilities in the first six months of the current fiscal year stood at 491 billion rupees, showing a year-on-year growth of 15.5 per cent or 2 per cent of GDP.
Although not of his making, Finance Minister Ishaq Dar recently conceded before the parliament in writing, a series of violations of the Fiscal Responsibility and Debt Limited Act (FRDLA), along with the consequences of national indebtedness and cut in public welfare programmes
In his debt policy statement, the minister said public debt was recorded at 15.334 trillion rupees as on Sept 30, 2013 — an increase of 968 billion rupees in the first three months of the current fiscal year. “This rise in public debt is attributed to the increase in domestic debt by 641 billion rupees and external debt by 327 billion rupees,” he said.
Explaining, he said the first quarter of this fiscal had a translational loss of $665 million on account of cross-currency movement against the dollar. This loss was mainly due to dollar depreciation against SDR ($329 million), Japanese yen ($140 million) and euro ($160 million). In rupees, the debt increased by 311 billion rupees, owing to a 6.4 per cent depreciation of the local currency against the dollar.
The debt policy statement by Dar also noted that due to unavailability of sufficient external financing, the composition of public debt shifted towards domestic debt, and furthermore, into shorter duration instruments — a source of vulnerability and entailing high rollover and refinancing risks.
In such a situation, a rise in interest rates would have an adverse fiscal impact, while maintaining exchange rate stability was also essential as depreciation of the rupee would affect the government debt stock as well as its servicing costs.
“Going forwards, it highlights the importance of gradually lengthening the maturity profile of domestic debt, maintaining exchange rate stability and regaining growth momentum to reduce the impact of growing indebtedness,” he said.
In his compliance report to the parliament, Dar confirmed that the FDRLA 2005’s requirement of reducing the revenue deficit to nil not later than June 2008 and thereafter maintaining a revenue surplus, was missed again this year like every year since 2005.
But he attributed this to increasing exogenous and endogenous challenges, including the campaign against terrorism, fragile law and order situation, continued energy shortages, narrow tax base, non-materialisation of sufficient foreign inflows, floods of 2010 and 2011, and increasing debt servicing cost.
The law also stipulated that spending on health and education should be doubled to 1 per cent and 3.2 per cent respectively in 10 years beginning from July 2003. “This target was not achieved,” said the minister. Expenditure on health remained unchanged at 0.6 per cent of GDP, and while that on education remained less than 2.1 per cent since 2008.
High levels of debt have serious repercussions for the economy in terms of heavy debt servicing and decreased developmental expenditures.
High fiscal deficits, crowding-out of private sector investment, inflationary pressures and exchange rate instabilities are just a few of the social, political and economic implications of a now unsustainable debt burden.
The finance minister conceded that the public debt position has deteriorated over the last few years, resulting in large twin deficits — for fiscal and current account. “These deficits are adding to public debt and consuming a major chunk of revenues for debt service,” he said and agreed that the financing mix of the deficit was also an area of concern.
*US$1 = 104.90 rupees