The crushing burden of debt

Published September 3, 2018

Pakistan’s external and public debt escalated rapidly over the past 10 years because of heavy reliance on borrowing. The country resorted to borrowing due to a lack of improvement in the tax-to-gross domestic product (GDP) ratio and declining exports and foreign investment.

A lack of fiscal discipline and absence of reforms resulted in a 400 per cent increase in public debt to Rs24 trillion in 2018 from Rs4.8tr in 2007 as per data released by the State Bank of Pakistan (SBP).

More importantly, Pakistan’s total debt and liabilities increased to Rs29.8tr by the end of June, which is 86.8pc of GDP — well above the debt sustainability limit of 60pc of GDP. Similarly, Pakistan’s domestic debt rose to Rs16.4tr as its share in total debt and liabilities was close to 55pc.

Likewise, external debt and liabilities rose 137pc to $95.7bn, or 33.6pc of GDP, over the past 10 years. With increased borrowing to finance investment and consumption, external debt servicing surged to about $10 billion, or 40pc of export earnings, in 2018-19.

Estimated interest payment and loan repayment on both foreign and domestic debt will consume 39pc of the total revenue in 2018-19

Growing public debt has important implications for debt servicing obligations. The surge in public debt over the last five years has increased the debt-servicing burden in terms of interest payments and loan repayments on both foreign and domestic debt.

Debt servicing took up 41.8pc of current expenditure in 2012-13, but is going to consume 46.4pc in 2018-19. This will leave a share of 23pc for defense, 2.8pc for public order and safety, 1.6pc for economic affairs, 2pc for education, 0.3pc for health and 0.05pc for housing and communities at the federal level.

It will be a daunting challenge for the new government to fulfil its promises about education, health and housing using such meagre resources. It will have to allocate huge resources for development expenditure to achieve its objectives of poverty reduction and provision of 10 million jobs.

The estimated interest payment and loan repayment on both foreign and domestic debt will consume 39pc of the total revenue in 2018-19. Clearly, if more than one-third of the total revenue of the country is spent on interest payment and loan repayment alone, there will be little room to increase expenditure on essential services, like health, education and housing.

As a result, the quality of human capital is going to decline, impacting the level of poverty adversely.

It is noteworthy that the origin of the country’s economic crisis is the historically high current account deficit of $18bn in 2017-18. Accounting for external debt servicing of around $10bn and assuming that the government will contain the current account deficit through regulatory measures in 2018-19, the country’s financing need will be $28bn for 2018-19.

With available financing based on the Finance Division’s projections at $12bn, the financing gap will still be around $16bn. If finances are not arranged during the next few months, the country can default on its foreign debt obligation.

In the case of a default on the foreign debt obligation, the economy will take a severe hit as the burden of the cost of economic mismanagement will be disproportionately borne by the poor and low- and middle-income people.

Immediate policy decisions are required to fill the financing gap. This can be done by borrowing from multilateral institutions or donor countries and reducing debt servicing by rescheduling past loans.

Meanwhile, the new government needs to pursue a debt reduction strategy by reducing the trade deficit via expansion in exports and import savings, restructuring of the Paris Club debt, retirement of expensive commercial loans, large-scale privatisation and arrangement of loans from China, Saudi Arabia and other friendly countries.

The writer is professor at the Pakistan Institute of Development Economics, Islamabad.

Published in Dawn, The Business and Finance Weekly, September 3rd, 2018



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