Soaring public debt

The latest estimate of the stock of public debt of Pakistan by the SBP (State Bank of Pakistan) as of end-March 2022 is a staggering Rs 44.4 trillion. In effect, each citizen of Pakistan is indebted to the tune of Rs 200,000. Almost six years ago on June 2016, the level of public debt stood at Rs 19.7 trillion. Therefore, the increase cumulatively in this period has been as much as 125 percent.

The SBP defines public debt as consisting of government domestic and external debt and debt with the IMF (International Monetary Fund). This definition is used to project the level of public debt as of the end of June 22. The budget deficit in the fourth quarter of 2021-22 is estimated at Rs 2,142 billion. The rise in the rupee value of external debt from end-March to end-June is added to the budget deficit to arrive at an estimate of the total stock of public debt as of the end of 2021-22. The resulting estimate of the level of public debt is Rs 49.1 trillion as of end-June 2022.

The increase in public debt in 2021-22 is unprecedented. There has been a quantum jump of Rs 9.2 trillion in one year, the highest ever. The rate of increase is as high as 23 percent. The last time there was also a big absolute increase in public debt was in 2018-19, when it surged by Rs 7.8 trillion, with a growth rate of 31 percent.

The extraordinary increase in public debt in these two years is due to two factors. First, a relatively large federal budget deficit necessitated bigger borrowings. The federal budget deficit in 2018-19 was at the peak level of 8.9percent of the GDP. It has also been relatively high in 2021-22 at 7.8 percent of the GDP, according to the revised estimates.

Second, the rate of depreciation of the rupee has been larger in both 2018-19 and 2021-22 at 33.5 percent and 30 percent, respectively. Consequently, there have been large increases in the rupee value of external public debt.

The evolution of the public debt to GDP ratio since 2015-16 has been exceptionally rapid. It stood at just over 60 percent of the GDP as of the end of 2015-16. By the end of 2019-20 it had reached an all-time peak of almost 76.6 percent of the GDP. Thereafter, it fell to 71.5 percent of the GDP in 2020-21, when the value of the rupee remained, more or less, nominally stable. However, it started increasing once again. The provisional estimate of the public debt to GDP ratio as of the end of 2021-22 is 73.3 percent of the GDP.

Fortunately, the rebasing of the GDP from 2005-06 to 2015-16 has implied a significantly lower public debt to GDP ratio. For example, the new GDP estimate at current prices is 17 percent larger. Consequently, this has brought down the public debt to GDP ratio to 73.3 percent of the GDP versus as high as 85 percent of the GDP in 2021-22 in the absence.

The big jump in the public debt to GDP ratio during the last six years has led to a big violation of the Fiscal Responsibility and Debt Limitation Act of 2005. According to Article 3 of the Act, beginning from the financial year, 2016-17, the total public debt shall be reduced to sixty percent of the GDP. It was close to 60 percent of the rebased GDP in 2016-17. However, it now stands at an estimated 73.3 percent of the GDP as highlighted above. This is a very big violation of the Act.

The present government has recently tabled before the National Assembly Standing Committee on Finance and Revenue some major amendments to the Fiscal Responsibility and Debt Limitation Act. The amendments now envisage that the public debt to GDP ratio will be brought down once again to 60 percent of the GDP by 2026-27. This is to be achieved by a reduction in the ratio by at least 2 percent of the GDP each year from 2022-23 onwards. The Committee has endorsed the proposed amendments.

The targeted fiscal deficit of the federal government in 2022-23 is Rs 4,547 billion, equivalent to 5.8 percent of the projected GDP. If the depreciation of the rupee can be contained to close to 15 percent, then with an over 22 percent jump in the nominal GDP, it will be possible to bring down the public debt to GDP ratio by 2 percentage points in 2022-23.

However, this requires a big reduction in the federal budget deficit from 7.8 percent of the GDP in 2021-22 to 5.8 percent of the GDP in 2022-23, based on rapid growth in revenues of 24 percent and only a small increase of 2 percent in current expenditure. Both these targets will be extremely difficult to achieve. On top of this, the rupee will be under pressure throughout the year given the low level of reserves. Despite some recovery last week, it is still down by over 7 percent since end-June 2022.

The Fiscal Responsibility and Debt Limitation Act also requires the federal government to include a medium-term budgetary statement in the annual budget statement to be laid before the National Assembly each year. This has been done for 2022-23.

The three-year projections are extremely ambitious and like the previous statements go beyond the realm of possibilities. The FBR tax-to-GDP ratio is targeted to increase by 0.8 percent of the GDP by 2024-25. The overall deficit is to be brought down by 4.2 percent of the GDP in these years. This implies that expenditure will have to be curtailed by over 3 percent of the GDP. In the presence of rapidly rising cost of debt servicing this is extremely unlikely. In line with the agreement with the IMF, the primary deficit of 2.4 percent of the GDP in 2021-22 is to be converted into a surplus of 0.2 percent of the GDP in 2022-23 and to a surplus of 1.8 percent of the GDP by 2024-25.

The bottom-line is also missing in the medium-term budgetary statement as to what is the targeted level of the public debt to GDP ratio up to 2024-25. This must ensure a 2 percent of the GDP decline in the ratio annually over the next three years.

Overall, Pakistan’s public debt to GDP has soared to above 73 percent of the GDP in the last six years. This is a strong indictment of the quality of public financial management. We can only hope and pray that it will be brought down by at least 2 percent of the GDP each year over the next five years to take it back to the upper limit of 60 percent of the GDP imposed by the Fiscal Responsibility and Debt Limitation Act.

Copyright Business Recorder, 2022