In an article written a couple of weeks back, “Pakistan’s debt: putting the record straight”, the Finance Minister explained that why in his opinion both Pakistan’s domestic debt and external debt are well under control and how the public debt management under his government is progressing quite well. Anyone claiming differently is either biased or doing a disservice to the country – rather sweeping assumptions one must say or the classic case of ‘shooting the messenger’! Anyway, back to Mr. Dar’s piece, which in essence claims the following 3 things: a) the national domestic debt portfolio as part of the total public debt is much bigger than the external debt portfolio (net domestic debt constitutes 66% and external debt 34% of the total net public debt), b) stating external debt at $73 billion is in-correct since one should not lump together public & private external debts, and c) in the total public debt the year-on-year growth of its short term portfolio is 8.4%; for the medium term it is 13.7%; for the external debt the annual growth is 6.3%, and that all these growth levels in each of the specified debt components cannot be termed as being ‘exponential’.

Even though none of his explanations can entirely be backed by textbook theories or real-life examples, still one must concede that the finance minister is entitled to his opinion. The problem however is that regardless of how one justifies the level and nature of debt, one cannot wish it away: it remains tangible and ‘payable’. So a fair question here would be that what exactly is Pakistan’s present debt profile? As per the figures released by the State Bank of Pakistan (SBP) in November 2016, the total Central Government debt as on 30.09.2016, stood at Rs19.9 trillion, ‘excluding liabilities’, and of which the domestic debt constitutes Rs14.4 trillion while external debt makes up Rs5.5 trillion. Meaning, this is excluding government’s contingent liabilities, which in their own right have swelled to nearly Rs1 trillion. What this latest debt number also means is that over the first quarter (July-September) of this fiscal year, the government added to the debt by some Rs858 billion, taking the debt to GDP ratio to nearly 69.50%, which in June 2016 stood at around 66.50%. The trend is rather alarming because despite government’s claim of being at the peak of debt’s bell curve, which theoretically meant that the national debt should have started to come down, it instead is going in the reverse direction!

This, not withstanding, when finishing the last fiscal year, the government made a clever move by amending the ‘Fiscal Responsibility and Debt Limitation Act of 2005’, through a Finance Act that literally changed the debt goalposts. The Finance Ministry not only diluted the law but also got relaxed the statutory limit of restricting the public debt at 60% of GDP. Both the previous PPP government and the present PML-N governments have been in violation of this condition. With this act, the PML-N government has now set a new statutory deadline of June 2018 to bring the debt back to the 60% level of the GDP, as against the earlier deadline of June 2013. Alarmingly, Pakistan’s debt sustainability indicators have significantly worsened in recent years and especially in the last three years due to a high increase in foreign exchange and refinancing risks, which appear to be the result of reckless high cost borrowings. The average time to maturity of public debt fell in fiscal year 2015-16, which in-turn has increased the refinancing risks and similarly, the short term foreign currency debt as a percentage of official liquid reserves and net international reserves increased in fiscal year 2015-16, which in-turn increases the foreign currency risk. The SBP data further revealed structural changes that took place in the country’s domestic debt profile during the last one year. It showed that the share of long-term permanent debt in the total domestic debt was significantly reduced, which has heightened risks attached with rollover of maturing loans. Additionally, to simplistically assume that domestic debt is less risky than foreign debt at times can be foolhardy.

Still, to be fair to the government, in its defense it argues (and as Mr. Dar explains) that its debt management strategy clearly sets target ranges for currency, refinancing and interest rate risks, and though quite a few indicators are currently in red, they still fall within the limits prescribed in its Medium Term Debt Management Strategy 2016-19. It further takes heart from the some global statistics by citing that amidst a high prevalent global debt phenomenon, Pakistan’s current debt at around $73 billion (over a population base of 200 million) is still quite manageable in comparison with say for example, Greece $367 billion, Ireland $865 billion, Spain $1 trillion and Italy $1 trillion. Fine, but the underlying flaws in such an argument is that not only are all these European failed economies, but also that they represent a single monetary block that gets balanced through a complex system of intra-regional monetary balancing mechanism overlooked by a rather thinly accountable European Central bank - Pakistan on the other hand is neither an European economy nor does it have the luxury of printing at will to pay for its external liabilities.

However, the underlying weakness being that Pakistan’s debt profile presents a much bleaker picture when one starts to dissect the nature of both its historical debt and the one that has been piled up in recent years. The historical debt profile (as we know) has little to show for itself: national infrastructure fails to match that of any developed economy; public support systems of health, housing, utilities, education and social benefits remain unsatisfactory; stubborn poverty level stuck at about 30% or more; extremely narrow and small industrial base; and a top heavy public administration system that despite being inefficient has become further entrenched over time.

To make matters worse, during the past three years, the government has been on a borrowing binge, acquiring expensive foreign and domestic debt at commercial rates. While it has repeatedly claimed that it is increasing its credit only to the extent of the budget deficit requirements, the reality is quite different. For example, the increase in federal government’s debt from July-September 2016, adds up to Rs858 billion, whereas, the budget deficit in the same period was only Rs450 billion - about half. So where is all this money going? And it is the answer to this question that forms the real worrying part. Borrowing in itself is not essentially a bad thing as long as it can be spent in a productive manner. If all or majority of these borrowing would have been put to productive use in self-sustaining projects or outlays, it would have been wonderful, because essentially the government could have claimed success in raising necessary investments and then putting them to use in a manner that not only generates growth, but also leaves the country richer in due course. Sadly, when we look at the spending priorities of this government and calculate the element of self-sustainability in the various big projects currently underway, this has clearly not been the case!


The writer is an entrepreneur and economic analyst.