Govt adds Rs3.9tr to public debt in 10 months of FY19

It is nearly half the amount taken by PPP govt in its full five-year tenure

Shahbaz Rana June 14, 2019

ISLAMABAD: The federal government has added Rs3.9 trillion to the public debt in just 10 months of the current fiscal year, which is nearly half of the amount that the Pakistan Peoples Party (PPP) government added in its full five-year term.

The central government’s total debt surged to Rs28 trillion with net addition of Rs3.9 trillion from July through April of the current fiscal year, reported the State Bank of Pakistan (SBP). The central government’s debt increased at an alarming pace of 16% in first 10 months of this fiscal year, showed the SBP data.

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The increase in public debt was nearly half of the debt that the PPP government added in five years. During the PPP’s 2008-13 tenure, the public debt surged from Rs6 trillion to Rs14 trillion. In the next five years of PML-N government, it hit the Rs24.2-trillion mark with an addition of Rs10 trillion.

Prime Minister Imran Khan has been very critical of the economic policies followed by the PPP and PML-N governments and has announced the constitution of a commission to investigate the reasons behind the addition of Rs18 trillion to the debt stock in 10 years. However, at the current pace, it seems that the government of PM Imran may add over Rs20 trillion to the public debt.

The prime minister on Wednesday chaired a meeting to finalise terms of reference of the commission, which will investigate the Rs18-trillion addition to the public debt. But Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh did not attend the meeting at the PM Office.

Shaikh was the finance minister from 2010 to 2013 during the PPP tenure.

The accumulation of debt is the direct result of the gap between expenditures and revenues, which is widening due to the inelasticity of debt servicing and defence needs and the Federal Board of Revenue’s (FBR) failure to enhance revenue collection. Steep currency devaluation also contributed to the Rs3.9-trillion addition to the central government’s debt.

In first 10 months of the current fiscal year, the FBR suffered a shortfall of Rs345 billion in revenue collection.

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Next year, the federal government will spend nearly 68% of the total budget on debt servicing and defence of the country.

The overall increase in the central government’s debt does not seem to be in line with budget deficit expectations due to the currency depreciation. An increase in interest rate by the State Bank of Pakistan (SBP) has also added at least Rs500 billion to the cost of debt servicing. The central bank raised the key interest rate by another 1.5% to 12.25% last month despite a decline in core inflation.

The external debt of the central government increased 22.5% to Rs9.55 trillion in first 10 months of the current fiscal year. There was a net increase of Rs1.8 trillion in the external debt, largely due to currency depreciation.

In June 2018, the value of a dollar was equal to Rs121.54, which reached Rs141.32 by the end of April 2019, according to the central bank. Since then, the rupee has further shed its value and was traded at Rs152.90 in the inter-bank market on Thursday.

This shows that the central government’s debt will take another major hit in June due to currency depreciation.

The Rs9.55-trillion external debt does not include loans of $5.2 billion obtained from Saudi Arabia and the United Arab Emirates. These loans are the responsibility of the central bank.

The ballooning public debt remains a concern due to the previous government’s inability to attract non-debt creating inflows and enhance tax revenues. The PTI government is also struggling to enhance exports despite devaluing the currency.

The most worrisome aspect was the continued growth in short-term domestic debt, which exposed the government to refinancing and interest rate risks. The share of short-term public debt increased to 58% or Rs10.73 trillion by the end of April.

In June last year, the short-term domestic debt stood at 54.1% or Rs8.9 trillion. The short-term debt grew Rs1.84 trillion or 20.8% in 10 months.

The federal government’s total domestic debt increased to Rs18.52 trillion, an addition of Rs2.1 trillion or 13% in 10 months of the current fiscal year. In Jul-Apr FY19, the federal government’s debt acquired through Market Treasury Bills (MTBs) from commercial banks massively decreased after it shifted financing to the central bank.

The government’s total borrowing through MTBs decreased Rs1.6 trillion to Rs3.7 trillion. The MTBs issued to borrow from the central bank rose to Rs7 trillion, a net addition of Rs3.4 trillion or 95.4% from July through April.

However, the trend is going to shift from next fiscal year after the International Monetary Fund has imposed a restriction on borrowing from the central bank. The long-term debt, which was earlier shrinking, also went up 3.6% to Rs7.8 trillion. The debt obtained through prize bonds increased 12% to Rs952 billion.

Published in The Express Tribune, June 14th, 2019.

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