The level of domestic debt and liabilities has risen quite sharply in recent days and weeks. According to the latest data released by the State Bank, the federal government's domestic debt and other liabilities have continued to grow and reached Rs 15.889 trillion at the end of December, 2017, up from Rs 15.306 trillion at the close of June, 2017, depicting an increase of Rs 583 billion or 4 percent. Year-on-year basis, the stock of domestic debt and liabilities posted an increase of 9 percent or Rs 1.348 trillion in CY17. The federal government's domestic debt rose by 4 percent or Rs 588 billion, reaching an all-time high of Rs 15.437 trillion as on December 31, 2017 compared to Rs 14.849 trillion on June 30, 2017 while domestic liabilities declined by Rs 5.1 billion to Rs 452.2 billion at the end of December, 2017. Category-wise, floating debt emerged as the key instrument for the federal government to meet its financial needs as stocks of floating debt reached Rs 7.589 trillion, up 16 percent at the end of first half of this fiscal year. Unfunded debt rose by Rs 45 billion to stand at Rs 2.81 trillion at the close of 2017 while permanent debt posted a decline of 9 percent or Rs 495 billion to Rs 5.03 trillion.
Such a rise in domestic debt and liabilities in a short period of time is of course disturbing. It would necessitate higher bank borrowings for debt servicing which is already a major chunk of budget expenditures. It would crowd out private sector credit which could spur growth and increase employment in the country. It may, nonetheless, be mentioned that developing countries like Pakistan usually need to borrow in order to facilitate their development processes. Prudent utilization of debt could lead to higher economic growth and help the government to pursue its social and development goals while unsustainable level of debt coupled with imprudent debt management could dampen economic growth by lowering the development expenditures owing to heavy debt servicing requirements to be provided in the budget. Pakistan unfortunately is a country where even primary fiscal balance is in deficit and most of the development expenditures are to be met through domestic and external borrowings. This is an unsustainable situation as the level of debt servicing would continue to rise with the increase in overall stock of debt, putting excessive burden on the budget and curtail space for other options, especially development expenditures. It may be stated that the data on domestic debt released by the State Bank is somewhat understated as it does not include contingent liabilities, such as the guarantees issued to Public Sector Enterprises (PSEs). If we include these liabilities, the level of domestic debt will be even higher. Pakistan's domestic debt comprises permanent debt (medium to long-term including PIBs, government ijara sukuk, Prize Bonds, etc.), floating debt (consisting of short-term domestic borrowing instruments like Market Treasury Bills) and unfunded debt (offered mainly through National Savings Schemes). It is quite clear that the size of domestic debt and liabilities needs to be reduced to sustainable levels, which is only possible through a reduction in budget deficit. The government had taken several measures in the last budget to increase tax revenues and contain expenditures, aimed at reducing the fiscal deficit but higher borrowings by the government shows that these steps have not been that successful and the fiscal deficit is going to be larger than the target during FY18. The prospects for FY19 are also grim because the next budget is going to be announced near the general elections when the governments usually want to present a very soft and liberal budget. The position would be even worse if we include external borrowings which are also skyrocketing. All of this calls for a comprehensive and prudent debt management strategy to ensure financial stability by mitigating the risks of excessive debt accumulation. Unfortunately, the FRDL Act, which was designed for this purpose, is not given much importance by the authorities.