EDITORIAL: In a press briefing, the Finance Ministry claimed that 11.2 trillion rupees was added as debt during the past two years and that domestic debt was reduced by re-profiling through increasing its tenor by an average of 2.7 years (when the PTI would still be in government), with critics lamenting the extension at a time when the discount rate was prohibitively high at 13.25 percent implying a higher mark-up rate each year though the payment of principal (debt repayment) was deferred. The question is whether this amount reflects only a rise in domestic debt or does it include foreign debt as well.
In 2018, total domestic debt was 16.4 trillion rupees which rose to 20.7 trillion rupees in 2019 and then again to over 23 trillion rupees in 2020. Thus domestic debt rose by more than seven trillion rupees during the past two years and the remaining 4 trillion rupees maybe attributed to a rise in foreign debt. As per budget documents, foreign debt rose from 1.4 trillion rupees (revised estimates for 2018) to 2.2 trillion rupees in 2019 (revised estimates for the year) though the Covid-19 assistance is not included which accounts for an additional 2 billion dollars (around 3 trillion rupees at today's exchange rate).
The markup paid on domestic debt in 2018-19 as per revised estimates was 1.68 trillion rupees while in 2019-20 it rose dramatically to 2.37 trillion rupees - a rise of 37 percent. And, disturbingly, acquisition of more debt was used not to retire previous debt stock but 2.5 trillion rupees of the acquired debt was used to fund the rise in expenditure other than for debt servicing, so claimed the ministry officials. This claim is not backed by data in the budget documents or indeed in synch with the recently released consolidated budgetary operations for 2019-20 as mark-up on domestic debt alone rose from 1.68 trillion rupees as per the revised estimates in 2018-19 to 2.37 trillion rupees last fiscal year (against the rise in total budgetary outlay including debt servicing from 6.4 trillion rupees in 2018-19 to 8.135 trillion rupees last year - or a rise of 1.7 trillion rupees that matches the rise in domestic debt markup).
The current fiscal year envisages a decline in current expenditure to 6.3 trillion rupees (against 7.6 trillion rupees last year); however, this is attributable to the government seeking a deferment on repayment on official assistance for this year, a facility allowed by the creditor nations/multilaterals in the aftermath of Covid-19 to developing countries if requested, till the end of the calendar year. Last year, the government disbursed 1.2 trillion rupees under this head while this year the sum earmarked is zero. It is necessary to note that the government's request for debt relief from official sources and not from commercial borrowing was premised on the assumption that seeking a deferment on commercial borrowing would have adversely impacted the country's rating by international rating agencies such as Moody's and Fitch.
Ministry of Finance also noted that 31 percent rise in debt was due to the rupee depreciation. The decision of the government to implement the IMF prior condition and adopt "a market-determined exchange rate (which) will help the functioning of the financial sector and contribute to a better resource allocation in the economy" has not achieved either of these objectives and instead the country's debt has risen with State Bank of Pakistan data based on its own analysis predating the IMF staff level agreement of 12 May 2019 revealing the currency is undervalued at present.
The government during the two years of its five-year tenure paid 19.257 billion dollars (debt and debt servicing to international development partners and foreign commercial banks including principal amount of 15.225 billion dollars and interest payments of 4.032 billion dollars) and while the bulk of this amount is no doubt due to loans acquired during the previous administrations yet significantly the government has (i) increased its reliance on commercial borrowing (very short term at a high rate of return) from 6.8 billion rupees in 2018-19 to a whopping 623 billion rupees last year; and (ii) subsequent administrations would have to pay back the loans acquired today.
It is obvious that the government's penchant for borrowing both from the domestic market and internationally has far exceeded previous administrations and sadly this reliance on borrowing is expected to rise given that the government has noted in writing to the IMF that it envisages 38.6 billion dollars of external loans during the thirtynine months of the programme. Contrast this with PPP's five-year term increasing domestic debt by around seven trillion rupees and foreign debt by 14 billion dollars while PML-N added around 7 trillion rupees to domestic debt and 30 billion dollars to foreign debt in its five years. One would hope that the Prime Minister takes cognizance of this data before making a comparison that is unlikely to stick.
Copyright Business Recorder, 2020
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