ISLAMABAD  - Policy Research Institute of Market Economy (PRIME) has noted that the increase in debt stock and debt servicing continue to pose a major threat to the government’s exchequer.

PRIME has released a report titled ‘Debt without Growth’ that assesses government’s two-year performance in the domain of public debt. “Total public debt has increased over the last two years owing to plethora of factors such as high debt servicing, persistence of primary deficit, shift towards floating exchange rate and a tight monetary policy,” the report stated.

According to the report, over the course of two years, Pakistan’s foreign debt and liabilities have increased from $95.2 billion to $112.8 billion, an addition of $17.6 billion or 18.5 percent. External public debt was recorded at $78 billion at end-June 2020, showing an increase of $4.5 billion during FY20. The pandemic caused the government to borrow an additional $3.7 billion worth of grants and loans from various countries to support the country’s corona relief efforts. Despite paying $24.5 billion in interest and principal loans over the past two years, the foreign debt and liabilities continue to surge, suggesting the possibility of slipping into a debt trap. The overall rise is mainly attributable to current account deficit financing, increased debt servicing and depreciation of rupee, all of which have exposed the country to exchange rate risks.

The PTI government, like its predecessors, has not been able to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment. Consequently, debt servicing remains the largest expense in the federal budget. The government paid $11.9 billion in external debt servicing during FY20 which is 23 percent higher than the amount paid in FY19.

It is pertinent to mention that ever since the PTI government came to power, Pakistani rupee depreciated by 39 percent as a result of a move towards market exchange rate as part of the IMF programme. The weakening of rupee however, has increased the burden of foreign debt and liabilities. Each rupee loss vis-a-vis the US dollar adds around Rs. 100 billion to the debt stock. Between April 2019 and June 2020, the rupee lost over 25 rupees which raised the debt repayments by Rs. 2.5 trillion.

The report notes that the PTI-led government added Rs. 11.3 trillion or 45.2 percent to the public debt in two years, which is more than Rs. 10.7 trillion or 74.8 percent stocked by previous government in five years. As of June 2020, total public debt clocks at Rs. 36.3 trillion with the government breaching 3 out of 4 targets under the Fiscal Responsibility and Debt Limitation Act (FRDL), 2005.

It has complied with only one target which is the issuance of new guarantees equivalent to under two percent of GDP. The violated targets include the current debt-to-GDP ratio exceeding the 60 percent limit, each year the public debt increased by more than 0.5 percent and fiscal deficit as a percentage of GDP in both years (8.9 percent in FY19 and 8.1 percent in FY20) exceeded 4 percent threshold of FRDL.

Furthermore, the total public debt-to-GDP ratio increased from 72.1 percent to 87.2 percent. The report postulates that with World Bank’s projected economic growth of 0.5 percent, the burgeoning debt-to-GDP ratio would be unsustainable, provided the stock of public debt is not curtailed in a timely manner. However, this would be possible only if the root causes of debt accumulation – revenue and foreign currency shortfall – are handled more efficiently.