The government debt outstanding is the debt that is to be serviced out of the Federal Consolidated Fund plus the debt with the IMF. It stands at Rs 75,042 billion as of February 2025, according to the figures released recently by the SBP.
The government debt consists of both domestic and external debt, as per the definition in the Fiscal Responsibility and Debt Limitation Act, amended up to 2022. There are three types of domestic debt, namely, permanent debt, unfunded debt and floating debt, distinguished primarily by the tenure of borrowing.
The absolute increase in government debt in the first eight months of 2024-25 is Rs 4,156 billion. This is higher than the total borrowing reported in the fiscal operations by the federal ministry of finance in the first three quarters of 2024-25.
The pattern of increase in government debt up to February in 2024-25 is very revealing. First, the external debt has shown exceptionally low growth of just over 1 percent, half of which is due to a small depreciation in the value of the rupee. This reflects clearly the difficulty in accessing external financing; especially, from private external lenders through bond floatations or commercial bank borrowing.
Second, the composition of domestic debt has changed substantially. The increase in long-term permanent debt accounts for almost 150 percent of the rise in domestic debt with an increase of Rs 5,776 billion. As opposed to this, there has been a drastic fall in floating debt of Rs 2,017 billion. Clearly, this is largely a reflection of market expectations about the future movement in interest rates. As anticipated, the policy rate of the SBP has declined by 5.5 percent points up to now in 2024-25.
There is need to quantify the burden of government debt in relation to the GDP. As of June 2024, it was 67.5 percent of the GDP. This ratio has declined somewhat to 66.4 percent of the GDP by February 2025. The growth in public debt has been 5.8 percent, while the likely increase in the nominal GDP at current prices has probably been close to 7.5 percent.
There is need to recognize that this decline has been facilitated by, first, the curtailment of the budget deficit up to now in 2024-25, partly due to record level of SBP profits of Rs 1,250 billion received in the first quarter of 2024-25. Second, the rupee value of external debt has shown little growth not only because of small net borrowing but also because of very limited depreciation of only 0.47 percent in the value of the rupee with respect to the dollar.
According to the SBP, the stock of government external debt as of February 2025 is USD 78.7 billion, excluding external liabilities. There has been an increase of only USD 0.6 billion during the year up to February. Despite the umbrella of an IMF programme, there has been increasing difficulty in accessing external financing. If workers’ remittances had not shown spectacular growth of over 33 percent, the foreign exchange reserves of the SBP would have come under stress.
The next step is to identify the long-term trend in the evolution of government debt. The magnitude of this debt as a percentage of the GDP, along with the share of external debt in this debt, is presented in Table 1.
====================================================================== Table 1 Share of External Debt in Total Debt----------------------------------------------------------------------As of June: Total Government Debt Share of External Debt (as percent of GDP) (percent)----------------------------------------------------------------------2009 52.6 51.22019 68.8 33.82021 71.4 31.22022 68.8 34.02023 74.9 35.02024 67.5 30.5======================================================================Source: SBP======================================================================The changes over time are influenced by a number of factors. The first critical magnitude is the size of the budget deficit and how it is being financed by domestic or external sources. Second, the rate of depreciation of the rupee impacts on the rupee value of external debt. Third, the GDP increase in nominal terms depends not only on the real rate of growth but also on the rate of inflation.
There has truly been a quantum jump in the size of government debt as a percentage of the GDP. It was relatively low fifteen years ago at 52.6 percent of the GDP. By 2022-23, it had reached the peak of almost 75 percent of the GDP. This was due not only to a large deficit but also because of a massive depreciation of the rupee of over 39 percent.
There is need to appreciate the significant fall in the government debt to GDP ratio in 2023-24. This is attributable to a significant curtailment of the budget deficit and relative stability in the value of the rupee, which limited the increase in the rupee value of external debt.
A significant indicator is the per capita burden of government debt today. It stands at just above Rs 300,000. Fifteen years ago it was close to Rs 46,000 only. It is not surprising that currently the entire net federal revenues are mostly pre-empted by the expenditure on debt servicing.
The government debt to GDP ratio is also relatively high of Pakistan. As compared to 67.5 percent in 2024, it is 59.2 percent in Malaysia, 56.1 percent in India, 54.3 percent in Thailand, 47.1 percent in Nepal and 39.5 percent in Bangladesh. However, this ratio is much higher in Latin American countries, at 81.2 percent in Brazil and 155.4 percent in Argentina.
Will the one percentage point drop in the government debt-to-GDP in the first eight months of 2024-25 be sustained in the last few months of the year? The answer is that there is likely to be a big jump in the budget deficit in coming months up to June 2025. Consequently, there may be some increase in the government debt to GDP ratio by the end of 2024-25.
Copyright Business Recorder, 2025
The writer is Professor Emeritus at BNU and former Federal Minister