Surging govt debt

The statistics on total debt of Pakistan as of end-December 2022 has been released recently by the SBP (State Bank of Pakistan). It stands at Rs 63.9 trillion. This implies a debt burden of almost 85% of the GDP. It was Rs 22.6 trillion in 2015-16, with the total debt to GDP ratio of 69%. It has almost trebled in absolute magnitude in the period of less than seven years.

The public debt is total debt excluding the external liabilities of the SBP, external debt of the private sector, both external and domestic debt of PSEs (Public Sector Enterprises), commodity operations and intercompany external debt from direct investor abroad.

It stands currently at Rs 52.7 trillion, equivalent to 82% of total debt and has increased sharply from 60% of the GDP in 2015-16 to 70% of the GDP.

The third level of debt categorization is government debt. This is defined in the Fiscal Responsibility and Debt Limitation Act of 2005 as government domestic and external debt, debt from the IMF (International Monetary Fund) but excluding government deposits with the banking system. The Act has set a limit on the size of government debt at 60% of the GDP.

The objective of this article is to focus on the size, composition and factors contributing to the growth in government debt. Table 1 below gives the evolution of government debt since 2015-16.

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                   Table 1
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     Size of Government Debt and as % of GDP
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                Size - (Rs in Trillion)   % of GDP
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2015-16                 17.8                  54.4
2016-17                 19.6                  55.1
2017-18                 23.0                  58.7
2018-19                 29.5                  67.3
2019-20                 33.2                  69.9
2020-21                 35.7                  64.0
2021-22                 44.3                  66.2
2022-23
(1st half)              48.0                  62.3
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Source: SBP
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The government debt as % of the GDP first exceeded the limit of 60% in 2018-19. This was also the year of the biggest increase in the ratio of almost 9 percentage points of the GDP.

Fortunately, the debt to GDP ratio came down significantly in 2020-21. It rose to over 66% in 2021-22, but the good news is that there has been a significant decline once again and it stands at 62.3%, not much above the limit imposed by the FR and DL Act of 60% of the GDP.

The fundamental question is whether this relatively low level of the government debt as % of the GDP is sustainable? The answer lies in the sources of increase in government debt.

These include the borrowing to finance the budget deficit, increase in value of external debt in rupees due to depreciation in the value of the rupee and change in the level of government deposits with the banking system.

The relative contribution of these three factors to the increase in government debt since 2015-16 is presented below in Table 2.

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                           Table 2
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      Factors Contributing to Increase in Government Debt
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                               2015-16 to    June 2022 to
                                2021-22     December 2022
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Increase in Government Debt       26.5                3.7
(Rs in Trillion)
% Increase due to:
Borrowing                         77.9               49.9
Depreciation of the Rupee         33.5               46.7
Change in Bank Deposits          -11.4                3.4
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Total                            100.0              100.0
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The actual fall in the government debt to GDP ratio of 3.9 percentage points of the GDP in the first half of 2022-23 is due to a number of factors. First, the budget deficit in the first half of the year is usually significantly less than half the fiscal deficit of the year.

This year it is likely to be less than a one-third of the projected federal budget deficit of 6.5% of the GDP in 2022-23.

Second, the SBP has actively managed the value of the rupee after September 2022 and kept it significantly overvalued up to the end of January 2023.

Thereafter, following the transition to a market-determined exchange rate policy the rupee has depreciated sharply by over 51% from Rs 176.57 per US$ in end-January 2022 to Rs 267.90 per US$ in January 2023.

This will increase substantially the rupee value of external debt by June 2022, if the same high rate of rupee depreciation persists.

Consequently, the projected value of the government debt as of end-June 2023 is given in table 3.

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                        Table 3
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           Projected Level of Government Debt
                      in June 2023
                                     (Rs in Trillion)
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Debt as of end-June 2022                         44.3
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Total Federal Borrowing                           5.5
Increase in External Debt due to
Depreciation of the Rupee                         9.5
Change in Government Bank Deposits                  -
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Debt as of end-June 2023                         59.3
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GDP (at MP)                                      84.1
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Government Debt as % of GDP                      70.5
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Therefore, there is the likelihood of a big jump in government debt to above 70% of the GDP for the first time.

The primary factor contributing to this is the risk of a relatively large depreciation of the rupee in the presence of the extremely low level of foreign exchange reserves and increasing difficulties in meeting the external payment obligations.

Based on the projected level of government debt at the end of 2022-23 and the likelihood of a continuing high policy rate with the prospect of more increases in coming months, the projected level of debt servicing in 2023-24 could rise to as much as Rs 6.8 trillion, representing an increase of over 30% over the likely level this year. This could raise the cost of debt servicing to almost 6.5% of the GDP.

The consequence will be that, like 2022-23, the debt servicing cost will be significantly larger than federal net revenue receipts. This will seriously raise doubts about the sustainability of federal expenditures. More cuts will be required in current expenditure, especially if it is proposed to enter a new IMF programme after June 2023 and agree to a containment of the size of the budget deficits from 2023-24 onwards.

Vigorous efforts will also need to be launched for resource mobilization through progressive taxation.

Copyright Business Recorder, 2023