THE rising pile of domestic debt is putting an unbearable strain on the national economy. According to a recent report of the State Bank, the government paid Rs541 billion to service the domestic debt during the first half of the current fiscal year. This amount was slightly higher than Rs534 billion paid during the same period of the preceding year. Though the interest rate has fallen significantly now as compared to the first half of FY15, the massive government borrowings during the first half of 2015-16 pushed up debt servicing .It is relevant to note here that the stock of government domestic debt increased by Rs685bn during the July-December period of the current fiscal year, while the total debt and liabilities rose by Rs864bn during first quarter of FY16. No wonder, SBP's Monetary Policy Compendium for January 2016 did not report any improvement on the borrowing side or debt servicing.
Most of the borrowing stems from the need to maintain lower fiscal deficit as required under an agreement with the International Monetary Fund. Fiscal deficit was recorded at 1.1 percent of GDP during the first quarter of FY16 compared to 1.2 percent in the first quarter of FY15. According to SBP, "During FY16 so far, government borrowing needs were entirely met from scheduled banks." Since the revenue collection has failed to meet the targets set in the previous budgets, the government would continue to keep borrowing, which will again increase debt servicing.
Rising debt servicing continues to eat into government's revenue - it paid Rs1.175 trillion during the fiscal year 2014-15. Interest payments on external debt increased to Rs109.9 billion from Rs91 billion in the previous fiscal year. According to the State Bank, Pakistan's external debt servicing rose to an alarmingly high level of $7 billion in FY14. The total amount paid in debt servicing last year included $5.910bn as the principal amount and $915 million as interest. The overall external debt and liabilities stood at $65.6 billion during FY14. Debt servicing is mainly on account of public guaranteed debt. These loans were obtained from multilateral and bilateral donors. However, the remaining payment was made to the International Monetary Fund .
A matter of special concern is that 47 percent of whatever the government generates in revenue is used to pay off debt. The interest payments on domestic debt are rising each year - the government has paid Rs3.123tr since 2013 - because of large accumulation of debts through Pakistan investment Bonds (PIBs) and treasury bills (T-bills). Banks and the corporate sector jointly hold PIBs, T-bills and sukuk worth over Rs7tr which requires massive debt servicing, which is about 40 percent of the government's revenue collection.
Independent economists are critical of the government's borrowing strategy which they say has failed to induce economic growth. Because of severe shortage of revenue the government is compelled to borrow more from both external and domestic sources. During the last two years, the government added Rs3.526tr to the domestic debt, which was Rs19.914tr at the end of FY15. According to a report, the debt and interest repayments would further rise by next year when the country's repayment to the IMF increases.
Experts fear that that external debt obligations are likely to endanger Pakistan's debt peofile, adding pressure on the country's foreign exchange earnings in the medium-term. The country's debt has grown since 2007, with successive governments making huge borrowings, pushing the country towards a debt trap. As of March 2015, the total debt liabilities of the country stood at Rs19,299.2 billion. The debt-to-GDP ratio stands at 66.4 percent. Ideally, this ratio should be less than 30 percent in order to allocate more resources to the social sectors.