Evolution of public debt

Pakistan today is one of the Asian countries with a relatively high level of public debt in relation to the GDP. As of the end of 2023-24, public debt was 68.3% of the GDP in Pakistan. The corresponding magnitudes were 51% in India, 47% in Indonesia, 61% in Malaysia and 62% in Thailand.

The per capita debt burden in Pakistan was Rs 85,000 a decade ago. Now it has approached Rs 300,000. This rise in indebtedness has implied an increasing share of federal revenues being pre-empted by debt servicing. This was 34% in 2013-14. By 2023-24 it has risen to 66%.

The fundamental question is the cause of the build-up of public debt and its composition today.

The absolute increase in the size of the public debt from 2013-14 to 2023-24 is Rs 56,149 billion. It was Rs 15,989 billion in 2013-14 and rose to Rs 72,138 billion by the end of 2023-24. The annual growth rate has been as high as 15%.

The evolution of public debt as a percentage of the GDP has been very rapid. It was 57.2% of the GDP in 2013-14 and rose to the peak level of 74.9% of the GDP in 2022-23. A significant fall has occurred in the public debt to GDP ratio in 2023-24, to 68.3%. This is due primarily to the nominal stability in the exchange rate preventing, thereby a significant increase in the rupee value of external debt.

The major factors contributing to the increase in public debt of Rs 56,149 billion over the last decade are as follows in terms of the borrowing needs:

Financing the 8,263

primary deficit: billion Rs

Financing interest 29,908

payments on debt: billion Rs

Increase in rupee 17,978

value of external billion Rs

debt:

Therefore, the largest factor contributing to the increase in the stock of public debt has been the interest cost of the outstanding debt.

There has been a growing pressure on borrowing because of the increasing trend in the size of the federal budget deficit as a percentage of the GDP. It was 6.2% of the GDP in 2013-14. By 2022-23 it had increased to 8% of the GDP. However, in 2023-24, there has been some decline in the size of the federal budget deficit to 7.3% of the GDP.

Further, there has been a fundamental change in the sources of financing of the federal budget deficit. In 2013-14, almost one-third of the financing was by external sources and the remaining two-thirds by domestic sources. The year, 2023-24, has seen only 4% of the financing from external sources. Consequently, 96% of the financing has been from relatively high-cost domestic sources.

The first six months of 2024-25 have seen even stronger constraints to external financing. The net inflow of external financing has actually been negative Rs 78 billion. This implies that the inflow of new loans has been less than the outflow of debt repayments. This is a stark reflection of the loss of credit worthiness of Pakistan with external lenders, especially in terms of flotation of Euro/Sukuk bonds or access to international commercial bank loans.

We turn now to the composition of the public debt of Pakistan. The distribution between domestic and external debt has not changed significantly. While net inflows have diminished, the value of outstanding external debt has increased more rapidly because of faster depreciation of the value of the rupee. Between 2013-14 and 2017-18, the cumulative decline in the value of the rupee was 30%. Since then, the fall has been as much as 50%.

There is need first to analyze the increase in external debt of the Government. It was $52.9 billion in 2013-14, equivalent to Rs 4786 billion. The level of external public debt reached $98.3 billion by the end of 2023-24. The rupee value increased to Rs 22,034 billion. The cumulative increase in the rupee value of external debt was as much as 360%.

There have also been changes in the composition of external debt by sources. The share of multilateral agencies like the World Bank and the ADB has declined from 47% in 2013-14 to 40% in 2023-24. The share of bilateral sources, especially China, has also declined from 32% to 24%. There has been the emergence of significant financing by the IMF and private sources, from 11% in 2013-14 to 21% by June 2024. However, between June 2024 and December 2024, there has been hardly any net inflow of external debt.

The composition of domestic public debt has also seen significant changes over the last decade. The share of long-term permanent debt has risen from 28% in 2013-14 to almost 75% by 2023-24. The combined share of short-term floating debt and unfunded debt has fallen sharply from 72% to only 25%.

This has had significant implications on the interest costs, along with a rising tendency of the rate of inflation till recently pushing up interest rates. The average interest cost on domestic debt was 9.8% in 2013-14. It has skyrocketed to 15.1% by 2023-24.

The developments on the public debt front in the first six months of 2024-25 need also to be highlighted. The level of external debt has remained virtually unchanged at $98.3 billion. With the minor appreciation in the value of the rupee, it has a fall in rupee terms by 1.2%. Domestic debt has increased by almost 5% and the total public debt by 2.6%. The increase has been limited by the profit contribution of Rs 1250 billion by the SBP to the federal government.

The primary concern will remain with the constraints to external debt inflows, despite the presence of an IMF Programme. This will continue to put pressure on the foreign exchange reserves. On the domestic borrowing front, there is need for diversification of sources. With the expectation that interest rates will gradually decline, a ‘locking-in’ to too much long-term debt must be avoided. There is need once again to focus on the role of government saving schemes to promote household savings.

The likelihood is that there will be a minor increase in the public debt to GDP ratio by the end of 2024-25. This will be due to low growth in the nominal GDP, because of the low rate of inflation. However, the increase will be limited by the stability in the nominal value of the rupee.

Copyright Business Recorder, 2025