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The SBP has released the number on the stock of Federal Government debt as of the end of November 2020. This debt now stands at Rs 35.8 trillion compared to Rs35.1 trillion five months ago at the end of June 2020. In relation to the level a year ago, the stock of debt has increased by Rs 3.7 trillion.

The good news is that the debt-to-GDP ratio has declined from 84.1 percent in June 2020 to 82.7 percent in November 2020. This is attributable to the appreciation in the value of the rupee from Rs 168.17 per dollar to Rs 159.38 per dollar in the last five months. Consequently, the rupee value of the external debt has been reduced by Rs 660 billion. However, the debt-to-GDP ratio was lower at 81.3 percent of the GDP in November 2019.

The question which arises is that if the debt-to-GDP ratio has fallen in the first five months of 2020-21 does this imply that the increase in debt has been limited and the budget deficit has been managed well?

The answer, unfortunately, is a no. The increase recorded in domestic debt is Rs 729 billion. In addition, the net external borrowing during the five months is $3.4 billion. This adds up to external borrowing of Rs 542 billion. Therefore, the overall borrowing is Rs 1271 billion. The budget deficit at the Federal level up to November 2020 is equivalent to 2.8 percent of the GDP.

The corresponding estimate of the budget deficit in the first five months of 2019-20 is Rs 877 billion, equivalent to 2.1 percent of the GDP. In absolute terms, the budget deficit is higher by 45 percent. The Federal budget deficit, according to the Federal Budget of 2020-21, is to be reduced by over 5 percent in absolute terms in relation to the deficit in 2019-20. Instead, it is growing rapidly and if this trend persists then the federal deficit by June 2021 is likely to way above the target level of 8.1 percent of the GDP.

The divergence is due both to lower rate of growth in FBR revenues than anticipated and faster increase in current expenditure than projected. The Ministry of Finance (MoF), however, claims that the deficit is under control as a primary surplus is being generated. Such a surplus is usually generated in the first two quarters and this is converted into a deficit in the third quarter and reaches a peak deficit level in the fourth quarter of the financial year.

Turning to the composition of the increase in domestic debt in the first five months, there are indications of substantially improved debt management by the MoF. There has been an increase of Rs 1406 billion in permanent / long-term debt and a reduction of Rs 572 billion in short-term / floating debt. This is the appropriate policy to follow at a time when interest rates are relatively low. Efforts should be made to ‘lock in’ lenders to these low rates for as long as possible by flotation of Pakistan Investment Bonds (PIBs) with longer maturity periods. This success in managing the composition of the increase in debt must be recognized.

There is need to focus also on the long-term evolution of the Federal Government debt. It stood at Rs 14 trillion at the end of 2012-13, equivalent to 62.5 percent of the GDP. This was already above the limit of 60 percent of the GDP imposed by the Fiscal Responsibility and Debt Limitation Act of 2005.The stock of debt increased by 73 percent to reach Rs 24.2 trillion by the end of 2017-18. The debt-to-GDP ratio rose during these five years to 70 percent of the GDP.

There is a need to recognize that the size of external debt in rupees was controlled by the limited devaluation in the value of the rupee. It depreciated during these five years by only 17percent. The new PTI Government was compelled to depreciate the rupee rapidly in the face of a record current account deficit of almost $20 billion left by the previous Government. From the 1st of July of 2018 to the 30th of November 2020 the rupee has depreciated by as much as Rs 43.79 per US$. The current stock of external debt stands at $73.5 billion. Therefore, Rs 3.2 trillion is the increase in the rupee value of external debt due to the cumulative devaluation of the rupee. This is equivalent to 24 percent of the increase since 1st July 2018.

One significant change in the composition of domestic debt is the recent decline in the share of unfunded debt. This is the flow of funds into National Saving Schemes. Borrowing by increasing the stock of unfunded debt has two positive effects. First, it limits the inflationary implications of budget deficit financing. Second, it promotes household savings. Fortunately, the rates of return have been increased recently. This should lead to increase in unfunded debt rather than in permanent or floating debt.

The final question relates to the implications of a return to the currently suspended IMF Program. The IMF includes debt owed to the IMF in General Government debt. This currently stands at $ 7.6billion, equivalent to Rs 1.2 trillion. The IMF projection is that the total Government debt will stand at Rs 38.8 trillion at the end of 2020-21. It has already reached the level of Rs 39.7 trillion as of the end of November 2020. It will be further exceeded in the next seven months.

Therefore, the likelihood is that the IMF will push strongly for a big containment of the budget deficit following the resumption of the Program. This has implications not only on the management of public finances for the rest of 2020-21 but also on the nature of the Budget of 2021-22. There is the risk that the incipient process of recovery of the economy will be throttled once again by a harsh Budget.

(The author is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021