External debt is one of the common elements found in developing countries to finance their deficits. Pakistan is no exception! It has become heavily indebted over the last five years. A major portion of its national income is spent on debt servicing every year. External borrowing is done not only to finance deficits, but also to put the economy on the pedals of growth cycle. If debt is utilised efficiently in a well directed manner, then not only the economy comes out of the crises, but it also grows. Accumulation in debt stock has been the prime problem faced by both developing and developed countries.

Developing countries face this problem more often, as they need to borrow to facilitate their development process and accelerate the pace of growth. However, the borrowed funds require to be allocated in a transparent manner free from their diversion to other improper expenditures. Though debt is useful for the economy’s growth, dependence on it must be closely monitored and proper strategy should be adopted for enhancing the repayment capability of the country. High and unsustainable levels of debt, as has been the case under the present government, have serious repercussions for the economy in terms of heavy debt servicing and decreased developmental expenditures, essential to carry on the growth process. The non-availability of funds for investing in the economy and increase in taxes for repayment hampers growth as it limits productive investment, resulting in the shrinking of the economy’s debt repayment.

The fiscal and real sectors of the economy are strongly linked to the internal and external debt through certain economic variables. On the one hand, it appears that Pakistan’s budget deficit is the major cause of domestic debt. While on the other, it turns out that deficiency in savings and the profligate manner of governance is the basis of foreign debt. Notwithstanding the rationale behind the occurrence of debt, a sound debt management strategy ensures that ample financing is provided for development so that growth objectives are met. The absence of prudent debt management is having serious consequences for the effective monetary management as well as fiscal operations of the government. Experts have pointed out that an inconsistent and non-coherent policy is placing an additional burden on the external account in the shape of a greater amount of resources being diverted to debt servicing.

Pakistan’s debt dynamics have undergone substantial changes since FY2008. Higher fiscal deficit has led to the accumulation of huge debt both in absolute and relative terms. Due to the non-availability of sufficient funds from external sources, financing focus shifted towards domestic sources that led to the shortening of maturity profile of public debt. A confluence of unfavourable factors, including lower GDP growth, devastating floods, severe energy shortages, haemorrhaging PSEs, high inflation, weak security situation and global economic recession has resulted in higher fiscal deficits in the recent past.

Financial discipline over a prolonged period is essential for maintaining macroeconomic stability in the economy. This essential requirement is being persistently ignored by the

PPP-led government. A rule-based fiscal policy was formed and incorporated in the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005, which was passed by Parliament in June 2005. This Act ensures responsible and accountable fiscal management by all governments, the present and the future, and would encourage informed public debate about fiscal policy. The provisions of the Act remain unimplemented.

The origin of current fiscal predicament can be traced back to FY2006-07, when the government extended wholesale subsidies with a view to protect more vulnerable segments of the society from the effects of global commodity price shock. However, such measures actually resulted in pressure on balance of payments, fiscal account and banking system liquidity. The economy finally paid the cost in the shape of currency devaluation with the rupee losing more than a third of its value, inflation reaching multi-decade highs of 25 percent in 2nd quarter of FY2008, benchmark interest rates being hiked to 15 percent and GDP growth falling to 3.7 percent in FY2008 and further to 1.7 percent in FY2009, 10 and 11 from an average of 6.8 percent during FY2003-07.

Nevertheless, post-FY2012 events have taught a very expensive lesson on the need to maintain fiscal discipline, as measures haphazardly designed to provide ‘relief’ eventually caused more ‘pain’ for the public in general. As a result, public debt to GDP ratio shot up to 59 percent in FY2009 from 54.4 percent in FY2007. Since then, it is hovering around 60 percent. Economic experts have suggested that tax and spending reform should be formulated to accomplish economic, social, and political objectives, rather than to hit a deficit target. The government will find it very difficult to achieve its budget deficit target, even if it were to cut spending on social services and development expenditures drastically.

This is because such draconian cuts would throw the economy into a deep recession that would reduce tax revenues. If this were done, it would have serious repercussions for the country’s stability and for its future. A better strategy would be to negotiate with multilateral agencies a programme that would allow the country to service its external debt, and gradually reduce its trade deficit until it reaches a more manageable level. During this time, the structure of spending should be analysed, and a realistic development programme should be devised.

A crisis of confidence in the government prevails that was unable to undertake strong economic measures, such as creating jobs, solving power and water shortages, and relieving poverty. There is also an inability to keep inflation in check, a neglect of some important components of the supply side of the economy, perceived inability to address the increasing fiscal and current account deficits that are believed in many quarters to be undesirable, and inadequate response to security threats.

The writer is a retired secretary to Government of Pakistan. Email: shakeelahmad1964@hotmail.com