Rise in debt stocks

According to the latest statistics released by the State Bank, the federal government's debt stocks (domestic and external) posted an increase of Rs 1.09 trillion or 5 percent from Rs 20.768 trillion as on June 30, 2017 to Rs 21.861 trillion by the end of November, 2017. SBP, however, has not included loans from the IMF in its statistics. The current increase originated from the rise in both domestic as well as external debt. During July-November of FY18, domestic debt surged by some 6 percent while external debt stock rose by 3 percent. Total domestic debt stocks reached Rs 15.766 trillion in November, 2017, up from Rs 14.849 trillion in June, 2017. Domestic debt stocks comprise of permanent debt, unfunded debt, floating debt foreign currency loans and short-term loans. In term of maturities, domestic debt comprised of Rs 7.823 trillion of long-term debt and Rs 7.943 trillion of short-term debt. External debt also soared by Rs 175.4 billion to Rs 6.094 trillion in November, 2017 compared to Rs 5.918 trillion in June, 2017. However, according to SBP, federal government's external debt excludes IMF loans to central bank for balance of payments support and some other foreign exchange liabilities but includes IMF loans for budgetary support.
Such a high level of outstanding debt and its sharp increase over the five months ending November, 2017 should be a cause of great worry for our policymakers because of its dire consequences for budgetary outcome and external sector accounts. We know that developing countries like Pakistan need to borrow in order to facilitate their development process and prudent utilization of debt could lead to higher economic growth and help the government accomplish its social and developmental goals. In our case, however, this has largely not been the case and the borrowed resources have been mostly spent on current consumption expenditures with the result that debt servicing obligations of the country have been increasing without a corresponding increase in debt servicing capacity of the government. Unsustainable levels of public debt and its imprudent use has, in fact, lowered the development expenditures owing to heavy debt servicing requirements every year. It may be mentioned that the above data on debt stocks do not include contingent liabilities of the government which are guarantees issued to public sector enterprises. If these guarantees are added, the total stock of debt would even be higher. On the domestic side, resources are mainly raised through NSS and the banking system while external resources are mobilized from multilateral and bilateral development partners, borrowings from foreign banks and through the issuance of bonds. It is sad that the Fiscal Responsibility and Debt Limitation (FRDL) Act passed in 2005 to keep the public debt within reasonable limits is also not being strictly adhered to; this is a red line that no government should cross. Another worry is that there is every chance of a sharp increase of public debt burden in future due to mounting pressure on the budget and the external sector of the economy. Increasing expenditures on the CPEC projects would also call for more borrowings - both domestic and external. In our view, it is imperative for the government to have a comprehensive and active debt management strategy aiming at debt sustainability and enhancing the debt servicing capacity of the country by utilizing the debt in an optimal fashion. Narrowing of budgetary gap and a reduction in current account deficit should of course be the first steps towards lowering the gross public debt.