Unprecedented surge in Pakistan’s national debt during last 5 years

By Usman Ahmed

Pakistan’s Public debt-to-GDP ratio mounted to 62.6 percent during Financial Year 2012 (FY12) and country’s total public debt now stands at Rs 12.9 trillion, according to annual report issued by the State Bank of Pakistan (SBP), which is more than double of the total national debt recorded in 2008 .

As of June 30, 2008, Pakistan’s total public debt stood at slightly over Rs 6 trillion, but, during its five-year tenure, the Pakistan Peoples Party (PPP)-led government has added Rs 6.9 trillion to the total debt stock, which means the incumbent government’s five-year borrowings are more than double of the country’s 61 years borrowings.

According to the Fiscal Responsibility and Debt Limitation Act of 2005, total debt should not exceed 60% of country’s Gross Domestic Product (GDP). The International Monetary Fund (IMF), However, believes even this threshold is too high. It suggests that developing countries like Pakistan must take their debt much below 60% of GDP to overcome hurdles standing in the way of venturing into world capital markets.

According to state bank, surge in public debt was due to a large fiscal deficit, increased government borrowings and exchange losses stemming from the depreciation of the Pak Rupee.

“Most of the increase in public debt was contributed by domestic debt: its share has increased from 54.7 percent in FY11, to 59.1 percent in FY12.  On the other hand, the stock of public external debt has declined by US$ 2 billion due to repayments to the IMF and currency revaluation impact.  However, in Rupee terms, this stock has increased due to the depreciation of Pak Rupee against US Dollar in FY12,” the central bank said in its annual report. “These debt dynamics indicate that Pakistan could move into a debt trap”

Stepping back, Pakistan’s external debt vulnerability has also increased during FY12; as in the absence of sufficient external inflows, the repayment burden of external debt (along with the financing of current account deficit) fell on the country’s foreign reserves. This resulted in downgrading of Pakistan’s sovereign credit rating to its lowest level, Caa1, by Moody’s in July 2012.

Furthermore, a regional comparison of Pakistan’s external debt also highlights the same dismal situation. According to the Global Development Finance 2012, Pakistan’s external debt is higher than the average South Asian and developing economies.

The state bank warns that a country cannot continue increasing its debt stock without a commensurate increase in its repayment capacity. Global experience shows that failing to adhere to this simple principle, has led to several episodes of defaults, on both external and domestic debts. To overcome the ongoing challenges to the macroeconomic stability of the country, SBP emphasizes the need for fiscal consolidation.

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