Responding to a request for a comment on the issue of public debt the federal finance secretary articulated the government’s view in detail. His response is as follows:
Public debt burden
Debt burden is only understood in comparison to its relation with GDP.
An analysis of the public debt to GDP ratio during the last 15 years reveals that in the period of high inflation, the ratio performed relatively better as the denominator became larger. This ratio mostly hovered close to 60pc even when real GDP growth was merely half a per cent.
For instance during the tenure of the previous government (2009-2013), average inflation remained around 12pc while real GDP was merely 2.8pc. Whereas, during the tenure of the present government, average inflation remained around 5pc while real GDP was over 4pc.
While the higher inflation could help reduce the public debt-to-GDP ratio, it has other adverse repercussions for the economy. Therefore, economic managers will always prefer high real GDP growth coupled with low inflation rather than low real GDP growth coupled with high inflation.
Another way to gauge the increase in public debt burden of the country is to compare it with relevant global public debt statistics.
Pakistan’s net public debt to GDP ratio increased marginally by 1.1pc during the last three years as compared with a 6.8pc increase witnessed in the global debt to GDP ratio (IMF World Economic Outlook, October 2016).
Misconception regarding external debt
A few analysts quote the level of public external debt in media as $73bn.They lump together public debt with private debt, which includes foreign exchange borrowings of banks as well as non-financial private firms.
The stock of public external debt as at end June 2016 actually stood at $57.7bn, up from $48.1bn as at end June 2013. This represents a cumulative annual growth rate of only 6.3pc per annum which certainly cannot be termed as an exponential growth, as claimed by some.
It may also be noted that a part of this increase has come from the IMF debt, which has been taken only for balance of payment support and not for budgetary funding.
Further, if a correct comparison is made between total external debt and liabilities at end June 2013 as $60.9bn and a corresponding number at end June 2016 as $73bn, the actual increase was $12.1bn out of which $9.6bn was recorded in external public debt and the remaining increase was recorded in the non-public sector, which are not the government’s obligation.
Another misconception is that the present government increased total debt by Rs8,000bn to reach Rs22,000bn. It is being calculated as follows: ie for end June 2013, only public debt numbers are compared with both total public debt as well as liabilities for end June 2016 to arrive at a misleading increase.
If a correct comparison is made between net public debt at end June 2013 as Rs14,290bn and a corresponding number at end June 2016 as Rs19,219bn, the actual increase was Rs4,928bn.
Even if total debt and liabilities are to be compared, the increase was around Rs6,100bn, inclusive of liabilities that are not a government obligation. This is summarised in table 2.
It is important to note that during the last three years (2013-14 to 2015-16) the external public debt has gone up by $9.6bn while the FX reserves of the SBP have increased by $12.1bn in the same period (or by US$ 15.3bn when compared from February 2014 to June 2016). Further, the present government has repaid around $12bn of external debt till end June 2016, which was mainly related to the previous government borrowing.
Despite these heavy repayments, the FX reserves of the country have risen to more than $23bn, of which the SBP reserves were $18.1bn at end June 2016, — equal to over five months of import-cover as compared to less than around 3 weeks of import-cover in February 2014 when the SBP reserves stood at $2.8bn.
A realistic approach to measure the external indebtedness of the country is to take the difference between external public debt and official FX reserves of the country.
As at end June 2013, the SBP FX reserves were around $6bn against which external public debt stood at $48.1bn, thus net external indebtedness was $42.1bn ($48.1 - $6.0). As at end June 2016 net external indebtedness was $39.60bn ($57.7 - $18.1).
Therefore, net external indebtedness of the country improved by $2.50bn compared with end June 2013.
A critical consideration in debt management is the sustainability analysis for which various indicators have been designed. Major debt sustainability indicators have improved in the last three years, a fact that is acknowledged by global stakeholders.
‘Refinancing risk of the Domestic Debt Portfolio’ was reduced through lengthening of the maturity profile at the end of June 2016. Percentage of domestic debt maturing in one year was reduced to 51.9pc compared with 64.2pc at the end of June 2013.
‘Exposure to Interest Rate Risk’ was also reduced, as the percentage of debt re-fixing in one year decreased to 44.4pc at the end of June 2016 compared to 52.4pc at the end of June 2013.
‘Share of External Loans Maturing within One Year’ is equal to around 31.9pc of official liquid reserves at the end of June 2016 as compared with around 68.5pc at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
The above evidence is sufficient to establish that the government has been able to reduce public debt vulnerabilities during the last three years.
—The writer is the federal finance secretary.
Published in Dawn, Business & Finance weekly, January 2nd, 2017