Rising public debt

The extremely worrying indicator today is the large and rapidly growing level of public debt, including the external liabilities, in Pakistan. As of the end of December 2022 it stands at Rs 55,206 billion.

This is equivalent to almost 74 percent of the GDP. A citizen of Pakistan carries a debt burden of almost Rs 240,000. A decade ago, it was almost half at Rs 129,000. 40 percent of the debt now is external debt and the remainder, 60 percent, is domestic debt.

Public debt was 77 percent of the GDP at the end of 2021-22. With a huge budget deficit approaching Rs 6,000 billion this year and the rise in the rupee value of external debt, due to the large ongoing depreciation of the currency, of almost Rs 9,000 billion, the level of public debt is likely to rise to Rs 67,000 billion by end-June 2022 and approach 80 percent of the GDP.

In one year, the debt will have increased by over 30 percent. Such a big increase has never been witnessed before.

This signifies the unbearable burden of public debt on the people of Pakistan. Based on the existing trends, the level of public debt and liabilities is likely to rise to the level of 100 percent of the GDP in the next few years.

The external public debt and liabilities have increased from $ 61.4 billion at the end of 2015-16 to $97.5 billion in December 2022. It is significant that they have come down from $100 billion in June 2022. There may be an inclination to see the reduction as a positive development.

It actually reflects the failure to obtain enough external financing to cover the external debt repayment from July to December 2022.This demonstrates the perception now of high risk of lending to Pakistan, especially by private lenders. This has increased the pressure on the scanty foreign reserves of Pakistan.

The rapid increase in the size of public debt has implied mushroom growth in the cost of debt servicing in the federal budget. A decade ago, it was just under Rs 1,000 billion.

Given the big recent escalation, with market interest rates rising to above 20 percent, the level of debt servicing is likely to be almost Rs 5,200 billion by the close of this financial year, as compared to the budgeted level of under Rs 4000 billion.

In effect, in ten years it will go up from 4 percent of the GDP to 6.2 percent of the GDP. It will eat up all the net revenue receipts of the federal government and will pre-empt almost 50 percent of total federal expenditure.

The consequence is a ‘crowding out’ of other expenditures by the federal government. This raises, first, the issue of sustainability of defence spending.

The current fiscal year is likely to witness a very unusual situation whereby the entire defence expenditure will have to be financed by borrowing by the federal government as debt servicing will pre-empt all the net revenue receipts.

The share of defence expenditure financed by net revenue receipts has plummeted from full financing to zero in just over a decade.

If Pakistan goes in for another IMF programme after June 2023, the pressure will be on generating a primary surplus in the consolidated budget of the federal and provincial governments.

The largest expenditure after debt servicing is on the defence budget, including the expenditure on defence services and military pensions. This will increase the need for some containment of the non-combat component of defence expenditure.

The second big implication of the big growth in the debt servicing burden is the massive cut in development spending in the PSDP so as to limit the size of the budget deficit.

Consequently, the size of the PSDP of the federal government is down by of over two-thirds as a percentage of the GDP. It was 1.8 percent of the GDP in 2015-16.

The current financial year is likely to end with federal development expenditure at only Rs 400 billion, equivalent to less than 0.5 percent of the GDP.

The extent of ‘spreading thin’ of project allocations is indicated by the fact that this relatively small amount of money is being allocated to as many as 1219 projects with a throw-forward cost plus the cost of new projects of over Rs 8,000 billion.

This implies that a project would henceforth take on average 20 years to be completed even if there is no escalation in costs due to the delay in implementation.

The huge delay in the construction of key water resources, power distribution, and highway projects will seriously limit the prospects for the future growth of the national economy due to binding infrastructure constraints.

The list of indicators of the on-going financial crisis is never ending. It includes the staggering annual losses of SOEs of over Rs 1500 billion, circular debt of the energy sector approaching Rs 4000 billion, the receivables of PSO, OGDC and others rising to over Rs 1800 billion, and so on and so forth.

The cost to the budget due to the contingent liabilities arising from guaranteed debt to SOEs alone has approached Rs 400 billion.

It continues to rise rapidly. During the first eight months of 2022-23, the stock of guaranteed debt has gone up by 11 percent. This is potentially a violation of one of the performance criteria agreed with the IMF.

There is no doubt that the magnitude of the indicators of the financial crisis clearly demonstrates that this is the worst economic crisis in Pakistan’s history.

However, there is no evidence yet of a firm resolve to emerge from this crisis by implementing major structural reforms for progressive resource mobilization and elimination of the extravagance and wrong priorities in current expenditure. The large budget deficit will also continue to put pressure on the current account deficit.

Copyright Business Recorder, 2023