Debt to GDP ra­tio

The Pak Banker - - FRONT PAGE -

Pak­istan's pub­lic debt in terms of to­tal size of the econ­omy is es­ti­mated to jump to a 15-year high of 70.1% by the end of PML-N gov­ern­ment's ten­ure, ex­pos­ing the coun­try to many risks and giv­ing less room for hu­man de­vel­op­ment spend­ing. The Min­istry of Fi­nance re­cently told the fed­eral cabi­net that the pub­lic debt-to-gross do­mes­tic prod­uct (GDP) ra­tio was es­ti­mated to peak at 70.1% by the end of fis­cal year 2017-18 in June. The high ra­tio vi­o­lates the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion (FRDL) Act of 2005. In ab­so­lute terms, the pub­lic debt, which is a di­rect obli­ga­tion of the fi­nance min­istry, will be Rs24 tril­lion by the end of June 2018. The 70.1% debt-toGDP ra­tio was 10.1 per­cent­age points higher than the limit set by par­lia­ment and 20 per­cent­age points higher than sus­tain­able lev­els for de­vel­op­ing coun­tries like Pak­istan.

This is the re­sult of an ex­pan­sion­ary fis­cal pol­icy, nar­row tax base, fail­ure to en­hance ex­ports and at­tract ad­e­quate for­eign di­rect in­vest­ment. Even Prime Min­is­ter Ab­basi had to say in the cabi­net meet­ing that loans were not an al­ter­na­tive to sus­tained rev­enue and in­come streams. How­ever, bor­row­ing has re­mained the most pre­ferred choice for the PML-N dur­ing its five-year ten­ure that is end­ing in around one and a half month. The 70.1% ra­tio was 8.7 per­cent­age points or roughly Rs2.9-tril­lion higher than the level that for­mer fi­nance min­is­ter Ishaq Dar had vowed to achieve by June 2018. While pre­sent­ing his last bud­get, Dar had com­mit­ted to low­er­ing the debt ra­tio to 61.4% by June 2018.

The 70.1% ra­tio had been the high­est since fis­cal year 2003-04 when it stood at 69.7%. Since then, the ra­tio had been on the wane, but it started in­creas­ing again in 2008-09. When the PML-N gov­ern­ment came to power in 2013, the debt-to-GDP ra­tio was 64%. In re­sponse to the wors­en­ing debt sit­u­a­tion, a com­pre­hen­sive debt bur­den re­duc­tion and man­age­ment strat­egy was de­signed in 2001 with a view to bring­ing it within sus­tain­able lim­its. This strat­egy, to­gether with favourable macroe­co­nomic de­vel­op­ments, be­came ef­fec­tive in re­duc­ing the debt bur­den to be­low 60% of GDP dur­ing the ten­ure of Gen­eral Pervez Mushar­raf. Pak­istan also got a ma­jor re­spite in 2002 when the Paris Club resched­uled the coun­try's ex­ter­nal debt of $12.5 bil­lion in re­turn for be­com­ing a front­line state in the war on ter­ror­ism.

Ow­ing to the grow­ing debt bur­den, in the next fis­cal year the fed­eral gov­ern­ment will spend Rs1.607 tril­lion or 30.7% of its bud­get on debt ser­vic­ing, which will pro­vide lit­tle room for de­vel­op­ment spend­ing. Un­der the amended FRDL Act, the pub­lic debt-to-GDP ra­tio had to be brought down to 60% by the end of fis­cal year 2017-18. There are three key rea­sons for the high ra­tio which in­clude about 10% de­pre­ci­a­tion of the ru­pee against the US dol­lar, higher-than-pro­jected bud­get deficit and in­creas­ing cost of debt ser­vic­ing. Par­lia­ment had ap­proved a bud­get deficit tar­get of Rs1.479 tril­lion or 4.1% of GDP for the cur­rent fis­cal year. But now the deficit would in­crease to Rs1.9 tril­lion or 5.5% of GDP.

Debt ser­vic­ing cost will also go up to Rs1.436 tril­lion dur­ing the out­go­ing fis­cal year against the bud­geted Rs1.363 tril­lion. For the next fis­cal year, the cabi­net has ap­proved a lower debt-to-GDP ra­tio of 67.6%. But the gov­ern­ment's bor­row­ing from the State Bank of Pak­istan for deficit fi­nanc­ing has again crossed Rs1 tril­lion for the sec­ond con­sec­u­tive year. Ac­cord­ing to ex­perts, the SBP has be­come com­pla­cent in dis­tort­ing the debt mar­ket. The whole sit­u­a­tion is in vi­o­la­tion of Sec­tion 9C of the State Bank Act 1956, which was pre­vi­ously con­sid­ered by the SBP as life and death is­sues for its sovereignty and in­tegrity of the fi­nanc­ing sys­tem.

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