Debt Policy Statement 2010-11: corrective measures must to check rising debt

Debt Policy Statement 2010-11 issued here on Tuesday warned the government that unless corrective measures on the fiscal and external fronts are adopted and properly implemented, the debt situation of Pakistan may remain vulnerable in the near-term.
Debt reduction to sustainable levels cannot be achieved without persistent economic growth. The slowdown in growth is a major consequence of rising debt burden and simultaneously adversely impacts the debt servicing capacity of the economy. Therefore, it is important for the government to adopt an integrated approach for economic revival and debt reduction strategy, which will require some difficult trade-offs in the short-term.
The statement mentioned that real growth of the public debt increased from 4.9percent of the GDP in fiscal year 2009 to 5.9percent of the GDP in fiscal year 2010, against which growth in revenues amounted to 2percent. Real growth in non-interest expenditures increased from minus 12.1percent to 13.5percent and real growth of GDP have been recorded at 4.1percent in 2010 against 1.2percent in 2009-10. Public Debt to GDP ratio has increased from 59.9percent of the GDP in 2009 to 60.60percent of the GDP in 2010. Public Debt to revenue ratio has been recorded at 428percent in 2010 as against 412percent in 2009.
The Debt Policy Statement issued by the Debt Management Wing of the Ministry of Finance said in its concluding remarks that Pakistan's debt dynamics have witnessed a gradual deterioration since FY08. Increased pressure on government's limited fiscal resources from internal security situation, rehabilitation of IDPs, power and food subsidies to insulate the general masses from rise in international commodity prices have resulted in increased debt burden. The total public debt stood at Rs 8,894 billion as of end June 2010 or 60.6 percent of GDP, an increase of 16.6 percent over the last fiscal year. Soundness of Pakistan's debt position, measured by various sustainability ratios, while deteriorating slightly from the previous fiscal year, remains higher than the internationally accepted thresholds. Total public debt levels around 3.5 times and debt servicing below 30 percent of government revenue are generally believed to be within the bounds of sustainability. Total public debt in terms of revenues has increased to 4.3 times during 2009-10, as opposed to 4.1 times in the previous fiscal year whereas the debt serving to revenue has declined to 40.4 percent in 2009-10 from 46.6 percent in 2008-9.
Regardless, the widening gap between the real growth of revenues and real growth of total public debt needs to be aggressively addressed to reduce the debt burden and improve the debt carrying capacity of the country to finance the future growth and development needs. The debt level is still sustainable, though a bit higher than acceptable threshold, however the real concern is the widening fiscal account deficits. In this context, it is imperative for the government to enhance the low tax to GDP ratio by bringing all sectors of the economy into tax net and withdrawing tax exemptions extended to various sectors. Implementation of RGST is the right step in this direction. Equally important is the rationalisation of current expenditure and curtailment of non-productive outlays that will bring improvement in the national investment climate, saving incentives and opportunities, and competitiveness of the real economy. Government's initiatives of restructuring Public Sector Enterprises, implementing National Governance Plan and Austerity measures would assist in achieving this objective.
Pakistan's external debt and debt servicing in terms of foreign exchange earnings stood at 1.46 times and 14.8 percent during 2009-10 compared to 1.48 times and 13.4 percent respectively in 2008-09. These indicators are still within the acceptable threshold of 2 times and 20 percent of foreign exchange earnings correspondingly. Encouragingly, the growth in non-interest foreign exchange payment was negative 4.9 percent whereas foreign exchange earnings recorded a healthy growth of 7.9 percent that helped reduce the current account deficit. Notwithstanding, the rising global commodity prices including oil prices, post-flood scenario and expected repayment of IMF SBA facility starting FY12 may exert pressure on current account in future. Government should take measures to augment the foreign currency flows to mitigate the effects of higher international commodity prices, ie, tap international debt capital markets as envisaged in the debt strategy, take measures to fast track projects to release sanctioned project loans of bilateral/multilateral agencies, further strengthen remittances initiative and boost exports.