ACCORDING to the debt policy statement 2012-13, our public debt-to-GDP ratio has breached the limit of 60 per cent allowed under fiscal responsibility and the Debt Limitation Act, 2005.

Citing higher debt-to-GDP ratios exceeding 100 per cent in some developed countries, the statement is, however, justified in rating our debt position as sound, thereby, dispelling immediate threats to the economy.

It is also encouraging to note that our debt ratio has declined from a peak of 100 per cent in 1998-99 to 61.30 per cent in 2011-12. Fiscal consolidation of such an unprecedented magnitude since 1999 notwithstanding, economic gains from corresponding degree of resultant fiscal space have not been so impressive.

Many developed economies with public debt burdens equivalent to or even greater than their entire national GDP have, despite financial crisis and recessions, not only sustained their economic growth but also added significant value to their economies. By contrast, our sound debt position has not proven to be a boon for our economy. This paradoxical situation shows that the size of debt is neither critical nor injurious to economic growth.

Empirical evidence also lends credence to this thesis. A July 2010 IMF study of 38 developed and developing economies for the 1970-2007 period found that the elasticity of growth with respect to debt is only -0.02.

The same study found that the elasticity of growth with respect to other variables (such as initial years of schooling which contributes positively to growth) is much higher (the size of the elasticity coefficient on schooling is well in excess of 2.0).

The economic growth is thus more a function of persistent but prudent spending on vital areas like education, health and infrastructure.

Such spending promotes formation of human capital which, in turn, brings in technological innovations leading to efficiency in all sectors of the economy.

The resultant economic growth develops a tendency to absorb shocks of debt accumulation and debt-servicing. While the need for containing debt well below or within ceiling cannot be overemphasised, it has become increasingly evident that not the debt size but the commitment to adequately and persistently fund vital sectors and exercising due diligence in utilising these funds hold the key to economic stability and development. The sooner this commitment is demonstrated, the better it is.

M. SHAHID DAYO Islamabad

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