Clarification

ISLAMABAD: This is in response to some media reports regarding increase in public debt during last three years while these media reports ignored the underlying reasons behind such increase. Therefore, in order to fully understand the underlying economic realities, there is a need to analyze the sources of increase in total public debt during last three years

a. Interest Expenses: Preference towards short-term domestic borrowing in absence of adequate cash buffers resulted in short-term profile of domestic debt at the end of FY2018. This short-term profile led to high interest cost on debt as interest rates had to be increased significantly to curb rising inflationary pressures. The government paid Rs7.5 trillion against interest servicing which explained 50 percent of the increase in total public debt.

b. Currency Devaluation Impact: Exchange value of the Rupee was maintained at an artificially high level in the past which triggered the balance of payment crisis. Transition to market-based exchange rate regime, being an unavoidable policy choice, resulted in sharp exchange rate depreciation leading to high inflation, high interest rates, slower GDP growth and lower import-related tax revenues. This exchange rate depreciation added around Rs2.9 trillion (20 percent of the increase) in public debt. It is important to highlight here that this increase was not due to borrowing but due to re-valuation of external debt in terms of rupees after currency devaluation.

c. Financing of Primary Deficit: The impact of economic slowdown due to the Covid-19 pandemic mainly resulted in higher than estimated primary deficits. Rs3.5 trillion (23 percent of the increase) was borrowed for financing of primary deficit.

d. Cash Management & Others: Rs1.0 trillion (7 percent of the increase) was on account of increased cash balances of the Government to meet emergency requirements as well as due to difference between the face value (which is used for recording of debt) and the realized value (which is recorded as budgetary receipt) of government bonds issued during this period. Government took the revolutionary and economically sound step of not borrowing from the SBP and maintaining a cash buffer, which led to a one-off increase in debt. However, this increase in debt was offset by corresponding increase in the Government’s liquid cash balances.

1. A better way to measure level of debt is through Debt-to-GDP ratio instead of looking at the absolute values of debt. In this light, it is important to highlight that Pakistan has witnessed one of the smallest increases in its Debt-to-GDP ratio during pandemic. Global Debt-to-GDP ratio increased by 13 percentage points, whereas, Pakistan’s Debt-to-GDP ratio witnessed minimal increase of 1.7 percentage points in 2019-20. Pakistan’s Debt-to-GDP ratio in fact reduced by 4 percentage points indicating lower debt burden at end June 2021 as compared with last fiscal year.

2. To conclude, the increase in debt during last three years occurred mainly during FY 2018-19 due to implementing difficult and unavoidable policy choices. Had the market-based exchange rate, a sustainable level of Current Account Deficit, adequate cash buffers and long-term domestic borrowing profile been maintained, the debt burden would have been reduced further on the back of fiscal consolidation efforts supported by aggressive control on expenses and growth in tax and non-tax revenues. As most of the major adjustments to fiscal and monetary policies have been made, debt burden is projected to decline firmly over the next few years.—PR

Copyright Business Recorder, 2021