It is highly disturbing to note that the outstanding stock of public debt continues to rise at a rapid rate without any hope of reversal in its trend in the near future. Briefing the National Assembly’s Standing Committee on Finance, a senior official of Debt Policy and Coordination Office of the Finance Division revealed that the present government has borrowed as much as Rs 3,653 billion during the first eight months of the current fiscal year. Out of this amount, Rs 1,421 billion was added due to depreciation of rupee. It was also stated that a very high current account deficit as well as other factors were behind this unprecedented rise in borrowings. The meeting was also informed that Pakistan’s total debt had reached Rs 28.6 trillion by March, 2019. Talking about the future, the Debt Office, however, was optimistic that the increase in debt would only be for a short period of time and the debt-to-GDP ratio would be reduced from the current level of 74.5 percent to 65 percent in five years’ time due to increase in the size of GDP. As for the future strategy, it was planned to reduce and maintain public debt-to-GDP ratio to a sustainable level and increase the maturity profile of public debt portfolio. Besides, an international expert was hired to prepare a three-year borrowing strategy to maximize debt issuance through international capital market and seek long-term concessional loans for development purposes.
It may be mentioned that it is not only the present government which has been guilty of excessive borrowings from both domestic and foreign sources. The previous governments were also equally responsible for raising the public debt and mortgaging the future of coming generations. It was hoped that the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005, which requires the government to take measures to reduce public debt and maintain it within prudent limits of 60 percent of GDP, will bind the future governments to act prudently but the provisions of the Act have been violated with impunity particularly since the 2008 general elections. For instance, total public debt which stood at only Rs 6.2 trillion or 58.4 percent of GDP at the close of FY08 increased to Rs 14.29 trillion or 63.8 percent of GDP during 2013 and went up further to Rs 24.95 trillion or 72.5 percent of GDP by the end of June, 2018 and reached Rs 28.61 trillion or 74.5 percent of GDP by end March, 2019. The reasons of such a sharply rising trend are not difficult to comprehend. Obviously, higher the budget and current account deficits of the country, higher will be the loan amount it would be forced to borrow to meet the financing gap and Pakistan seems to be moving in that direction quite rapidly. The Debt Office has argued that the country will be able to reduce its public debt from the present level of 74.5 percent of GDP to 65 percent but it is not likely to be true. While the public debt is likely to mount due to high fiscal and current account deficits, the GDP is expected to stagnate over the next few years because of stabilisation measures to be taken with or without a programme with the IMF.
It is quite clear that the sharply rising trend in public debt cannot be arrested easily and various measures have to be taken to reach this goal. Firstly, various political parties have to be taken on board to realise and explain to the public the gravity of the situation and the results of inaction in this regard. Secondly, the government should undertake major tax reforms to mobilise a much higher level of revenues and improve tax equity. We say this because it is nearly impossible to reduce the overall expenditures, particularly when the present government is initiating many schemes and projects that are essentially aimed at appeasing the public at large. And thirdly, all proceeds from the national assets to be privatised should only be used for the retirement of debt and not for additional expenditures or subsidies. On the external side, exports and remittances have to be enhanced substantially, imports have to be contained and exchange rate has to be maintained according to the market conditions. Besides, direct foreign investment which has decreased substantially during the current year has to be attracted in large amounts to revive economic activity and expand exports. Fortunately, Pakistan is likely to negotiate a programme with the IMF soon that is expected to push the authorities to take appropriate measures to move in the right direction and not derail the programme. There is overwhelming evidence to suggest that life of most of the people in Pakistan will not be easy in the near future. They have to tighten their belts firmly in the days to come to pay for the profligacy of successive governments and put the economy on a sustainable path of development.
(This news/article originally appeared in Business Recorder on May 14th, 2019)