The story of Pakistan’s public debt

The PTI government claims that it has paid back record debt. This is correct. During the last three years, the foreign debt repayments amounted to almost Rs3.5 trillion, much more than ever before.

PML-N claims that PTI added much more to the debt pool in three years, than it did in five. This is also correct. While PML-N government added Rs10.6 trillion to the gross public debt from 2013 to 2018, the PTI government added Rs13 trillion so far (till March 2021). But then we must also mention that the PPP government merely added Rs6.5 trillion to the gross public debt from 2008 to 2013.

The fact of the matter is that all sides pick numbers that suit their narrative, but the real story is somewhat different.

The nominal value of debt can be misleading. What really matters is the gross public debt as percentage of GDP.

The Fiscal Responsibility and Debt Limitation Act 2005 placed a cap on public debt, limiting it to 60% of GDP. However, by 2013, the PPP government had breached the cap by adding 5 percentage points, taking it all the way to 63.8% of GDP. The PML-N government further added 8.2 percentage points, whereas the PTI government has so far added 9.3%, taking the gross public debt to 81.4% of GDP.

How come the PTI government added so much debt in less than three years? The massive devaluation, which the government was forced to do in the wake of artificially overvalued exchange rate, explains a big part of the debt pileup. Right after the devaluation, the net addition to the debt slowed down, and the gross public debt as a percentage of GDP started to decline.

From June 2018 to June 2019, the rupee devalued by 34%, slipping from Rs121 per US dollar to Rs162, whereas the gross public debt increased by 19 percentage points, reaching 86% of GDP.

But since June 2019, our gross public debt has actually gone down by almost 5% of GDP. Much of it can be explained by the fiscal discipline imposed by the government and targeted reduction in primary deficit. But the real test of the PTI government starts now, where it faces a tough choice between an expansionary fiscal policy fueling growth but with rising level of public debt versus fiscal discipline with continued reduction in debt with modest growth. The realisation of the ambitious target set for FBR will also play a role.

The story of debt is not that hard to understand. The domestic debt is nothing more than accumulation of fiscal deficit over the years, whereas the external debt is the accumulation of current account deficit. The interest payments further compound the debt stock and as the government finds it hard to repay the principal, the previous debts are rolled over.

No political government restrains itself from excessive spending (unless pushed by IMF), because any fiscal cushion it would create would only benefit the next government. This twisted political economy creates perverse incentives for each government to play its part in perpetuating Pakistan’s debt crisis.

The country has now reached a stage where it not only needs to borrow to run the government but also to service the previous debt. In 2020-21, the federal government had net revenues of Rs3.7 trillion but paid Rs4.3 trillion as markup payments and foreign loans repayment. This is fiscally unsustainable but politically unresolvable.

The only way to lessen Pakistan’s debt burden is to broaden the tax net and reduce circular debt, pension liabilities, losses of state-owned enterprises and most importantly, non-productive civil and military government expenditures.

Published in The Express Tribune, July 6^th, 2021.

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