Pakistan’s debt and liabilities has increased to a record mark of Rs. 11.9974 trillion (66.4 percent of GDP) including domestic debt and liabilities 6.8280 trillion rupees and external debt and liabilities 5.1694 trillion rupees (US $ 60.12 billion) at the end of first quarter FY2011-12, according to the State Bank of Pakistan (SBP).
The debt directly owed by the government from domestic and external sources is called public debt. Debt is owed to manage expenditures for boosting productivity, alleviation of poverty, generating employment, social and economic development, and to increase economic growth. Increase in Public debt, due to sharp increase in domestic borrowing lead to inflationary pressures on the economy. Furthermore, debt servicing in the future hinder allocation of funds to other sectors of the economy.
Pakistan’s debt dynamics has undergone substantial changes in the last three-and-a-half years. At the end of March 2008 Pakistan’s outstanding public debt and liabilities were 6.159 trillion rupees (59 percent of GDP), including domestic debt and liabilities 3.267 trillion rupees and external debt and liabilities US $45.9 billion (Rs2.892 trillion), the present government has accumulated 5.8384 trillion rupees including 4.6154 from domestic sources and US $14.22 billion (Rs1.2230 trillion) International Financial Institutions (IFI’s) in between April 2008 to September 2011. Furthermore, the present government has borrowed 1.473 trillion rupees in between March to September this year, as Pakistan’s debt and liabilities till March 2011 were 10.524 trillion rupees including external debt and liabilities US $59.5 billion (Rs. 5.061 trillion).
Behind this gigantic debt accumulation by present government, there are two main reasons. The first and foremost is budget deficit on average has been 6 and 6.5 as percent of GDP over the last four years, the huge budget deficit occurred due to continuous policy of maintaining untargeted subsidies and to sustain the loss making public sector enterprises. The other main reason is sharp depreciation of exchange rate as Rupee is depreciated from 62 per dollar to 88 per dollar in the above said period. The sharp depreciation of exchange rate, contributed to the rise in public debt; this depreciation alone has contributed roughly, 1.3 trillion rupees of debt.
Saqib Sherani, former principal advisor to the government, is of the view that “if the same policy of borrowing money continues and the debt situation is not stabilised, the government will become even larger borrower in domestic markets. Two things will happen, firstly the private sector will be denied credit so there will be pressure on availability of credit and secondly the government will be biting up the price of the credit, so the interest rate will go up very sharply and for a very long time. What will happen is that both availability and pricing of credit will be affected for the private sector”.
Large debt always causes more interest payment and interest payment on Pakistan’s domestic and external debt and liabilities has increased to 806 billion rupees (4.46 percent of GDP). Debt servicing is also at very higher side and it stands at 1.4755 trillion rupees (8.2 percent of GDP), including above said interest payment at the end of first quarter FY 2011-12.
Debt-servicing and defence expenditures eat up the mainstay of Pakistan economy, i.e. revenues, leaving little space for development and social sector. Speaking at Lahore Chamber of Commerce and Industry in October, Chairman FBR Salman Siddique said, “the tax department’s almost whole revenue collections go to debt-servicing or defence expenditures, as out of total Rs1,558 billion revenue collected by the FBR during the last fiscal year, 750 billion rupees were used for debt-servicing and 441 billion rupees were used for defence expenditures”.
Talking about debt incurred from the IMF which is US $8.9 billion at the end of first quarter FY 2011-12, Pakistan paid about US $267.67 million (22.9 billion rupees) as debt-servicing, including US $174.16 (14.9 billion rupees) as interest payment on this debt to the IMF. Because of this serious repercussion, the aftershocks of the abstruse decision made by culpable former finance minister Shaukat Tareen will start coming from next year and Pakistan will be in a severe debt crisis in the next 2-3 years as the IMF debt payment will start from February 2012 and Pakistan will have to repay almost US $8 billion to the IMF in 3 years.
Curbing this situation and increasing efficacy, former economic advisor to the Finance Ministry, Dr. Ashfaq Hassan Khan suggests, “the only way to reduce the debt burden is maintaining fiscal discipline, meaning budget deficit should be brought down to 3 percent of GDP in the next three years. This will reduce the borrowing requirements of government and the pace of debt accumulation will also slow and debt as percent of GDP will keep on declining. Pakistan also has to maintain stability in exchange rate, as the depreciation of exchange rate that not only contributes to surge in public debt but it is also inflationary by definition.”
Therefore, if the government wants to bring this debt situation under control, reduction in fiscal deficit and stability in exchange rate are the main solutions.
Strolling debt management requires great aplomb for making onerous and pragmatic long term planning about repayment obligations, and to deplete the debt. If the country needs to borrow more, it should borrow prudently. On the other hand, FBR needs to make lucrative tax policy, and the government needs to develop such projects which further generate revenues, and also it needs to manage expenditures without leakages.
Lastly, if the trend of borrowing is not controlled by enhancing the ability to reduce debt through generating income from lucrative tax policy then Pakistan development spending and other necessary non-development expenditures will get squeezed and the inimical debt situation will have huge impact on inflation, growth, investment and fiscal stability and the country will stuck in stasis.