During the first two quarters of the current financial year, the total debt burden of Pakistan has soared to 11,054.7 billion rupees, which is an all time high. According to Economic Bulletin of Sustainable Development Policy Institute (SDPI) it was 10,769.8 billion rupees at the end of the first quarter, on September 30, 2010.
Out of this huge amount, domestic debt stands at 6049.7 billion rupees and the repayment of interest is met through internal fiscal resources which are being diverted away from development.
According to the report Pakistan''s external debt has also risen considerably after 2007, which currently stands at US $58.4 billion and was US$ 40.3 billion in 2007. Much of this loan has been used for balance of payment support, which became critical in 2008.
The bulk of domestic debt acquired during the second quarter of the current financial year (2010-11) is managed through monetary expansion bringing the overall value of the Pak-rupee down. It has increased the overall stock of foreign currency debt. In a nutshell, the fiscal policy of the government is primarily responsible for the increase in debt burden. Much of this debt is spent to meet current expenses, has little return in terms of future income or financial/physical asset generation. Had physical assets increased the country would have managed a lower debt to GDP ratio, even with a higher debt on the books.
The report further stated that the overall debt has risen to 69.1 percent of the Gross Domestic Product (GDP), which is much higher than the recommended limit. Out of the total debt burden, 63.1 percent increase is in domestic debt which is equivalent to 41.3 percent of Pakistan''s GDP and 4.2 times of the annual revenue. Financial experts take 3.5 percent of the annual revenue as the sustainable limit for domestic debt accumulation.
The debt stock is a sovereign liability, which is increasing the burden every quarter by a good percentage of the GDP. In the second quarter of the current financial year alone, it was 284.9 billion rupees, which is 1.9 percent of the GDP, estimated at the running year''s projected GDP.
The report states that the total stock of the government''s domestic debt, at the end of the second quarter of the current financial year on December 31, 2010, stands at 5294.7 billion rupees: "The public sector enterprises own another 390.7 billion rupees, which is sovereign in nature and is long-term. Any bankruptcy in these enterprises is a direct liability of the government. Another rolling debt stock of 364.3 billion rupees is booked in lieu of commodity operations, largely used to buy wheat and import of sugar. This brings the overall domestic debt stock to 6049.7 billion rupees".
The level of domestic debt accumulation is the most pressing issue, as interest liability on this kind of debt is a heavy burden on the budgetary framework, making it impossible to follow the medium term budgetary framework.
Much of the domestic debt is borrowed by the government either from the State Bank at higher rates or through the national investment schemes, where depositors are paid interest higher than the usual market instruments for social reasons. This makes it more expensive. Since the real growth of revenue is not higher than the real growth of debt, the debt-to-revenue ratio is increasing progressively. On the other hand tax-to-GDP ratio is dwindling progressively, and in the last few years the number has fallen from double digits to a single digit, at a little lower than ten percent.
By mid-October 2008, Pakistan''s foreign exchange reserves had plummeted and the nominal exchange rate depreciated significantly. As a result, Pakistan developed a macro-economic stabilisation programme supported by the International Monetary Fund. Pakistan signed a 23 month Stand By-Arrangement programme with the IMF amounting to US $ 7.61 billion, which was later augmented to US$ 11.33 billion in August 2009 and subsequently extended to September 2011. This is 271 billion rupees at the given exchange rate. Another 200 billion rupees were immediately added to Pakistan''s debt liability by the depreciation of the rupee against the US dollar.
Pakistan needs 365.1 billion rupees to reduce this mammoth debt liability during the second quarter of the current financial year. Even if borrowing remains stable, at the current rate, the government will need 1346.8 billion rupees for debt servicing alone for the year 2010-11. It was 1,082.6 billion rupees for the financial year 2009-10. On external side, the government has allowed the rupee to sink against the dollar for various reasons and a better export yield is one of them. However this increases the debt liability.
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