Domestic debt: historical rise

A recent critique by former SBP chief Shahid Kardar and former federal minister Hafeez Pasha should be raising eyebrows. The two economic experts, as quoted in a recent newspaper article, say the domestic debt to GDP ratio has gone up six points to 53.8% in just one year. They also mention that until March 2019, most historical increases in domestic debt were largely proportionate to the budget deficit, but after that, there has been a sharp escalation in outstanding domestic debt of Rs2.6 trillion in just three months from April to June 2019.

Overall, domestic debt has increased to Rs20.7 trillion, or 26.3% more than the previous fiscal year. Long-term debt more than doubled within a year, going from Rs7.5 trillion to Rs15.2 trillion by the end of June 2019. Yet, one year into its tenure, the PTI government continues to blame its predecessors for all that ails the economy. According to a most recent claim by Minister for Economic Affairs Hammad Azhar, the government added Rs1.2 trillion to the public debt in the last fiscal year in a bid to build a ‘cash buffer’ for timely debt repayment in the future. This, he insists, was necessary because the IMF had placed a ban on fresh borrowing from the central bank. The government borrowed the money through Market Treasury Bills and placed the amount with the central bank for future payments.

The Rs1.2 billion figure is, however, just a fraction of the Rs7.6 billion in public debt the PTI government added in its first year. The amount is equal to nearly 16% of the public debt that the government added in the last fiscal year. The minister also says that Rs3 trillion from the increase – i.e. 40% – was the devaluation effect on the old debt stock inherited by his party. He claims that the cash buffer will be needed for bond repayments beginning soon, and will also help the government shift its policy from debt rollover to debt repayment. The minister insists that the interest rate hikes and currency depreciation were the only solutions to the current account deficit.

All this, and we have still not even begun to get out of the rough economic waters yet.

Published in The Express Tribune, August 17^th, 2019.

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