Fattening public debt

The government has let debt grow at an astonishingly high rate of almost 16%, rising to Rs34.5 trillion by May 2020. The gross public debt figure is even higher, though official statistics will not be released until next month. While the government claims depreciation of the rupee, a decrease in tax revenue, and expenditure related to the Covid-19 coronavirus as reasons for the rise in the debt, at least one claim can immediately be shot down.

The budget book of supplementary grants shows that Covid-19-related spending was Rs289.4 billion, which is just 6% of the debt added between June 2019 and May this year. Even the rupee was actually appreciating against the dollar between until March when it crashed from Rs154 to Rs167. If anything, by blaming the currency crash prematurely, the government has just weakened one of its future arguments for why the debt rose when the next dataset is released. Meanwhile, the economic correction promised ahead of the 2018 elections seems even farther than ever.

The PTI government has now added over Rs10.2 trillion to the public debt since coming to power, an unprecedented figure for a government that is not even halfway through its term. The PM had vowed last February to bring the debt below Rs20 trillion. That would have meant a commendable debt reduction of about Rs4 trillion during his five-year term. Instead, he is on course to double public debt by the time the scheduled 2023 elections roll around. The government has not really offered a solution to the debt crisis. Its primary fix, converting short-term debt to long-term debt, is only exacerbating the problem by adding to debt-servicing costs while doing nothing to reduce the total amount owed.

The other government solution has been to amend the Fiscal Responsibility and Debt Limitation Act to empower its public debt office to plan and raise loans. While it sounds odd, debt reduction through debt creation can actually work, if it is thought out and done properly. Unfortunately, the World Bank found serious deficiencies in Pakistan’s debt management administration and policies. That leaves little hope for correction, but plenty of time to speculate over the next great excuse.

Published in The Express Tribune, July 17^th, 2020.

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