Unsustainable public debt

The government’s capability to sustain the total public debt is growing weaker and weaker

Finance ministry’s half yearly debt bulletin carries a dire warning: the government’s capability to sustain the total public debt – which stands at $233 billion as of December 2022 and includes $86.6 billion external debt – is growing weaker and weaker. How fast is the debt rising is evident from the fact that over the past six months alone, Rs3.6 trillion have been added to the public debt, taking the total to Rs52.7 trillion, in rupee terms. And that the country needs to service 28% of its debt – or $65 billion approximately – in just one year is what is sure to expose the nation to all types of debt-related risks.

The July-December 2022 report on public debt mentions several deteriorating indicators that point towards government’s increasing vulnerability to sustain and service the massive debt burden. These indicators are: the interest rate at a historic high of 20% which is contributing to a rise in the domestic debt whose share in the total public debt is 62.8%; the rise in the share of external debt in the total public debt from 37% to 37.2%, adding to the currency risks due to the rupee depreciating further and foreign countries shying away from extending loans; the weakening rupee due to falling exports and FDI and rising cost of debt servicing; reduction in the average time of maturity of the domestic debt from four years to three and half years in one year which would keep the country dependent on commercial banks out to exploit the situation; and the dip in the average time of maturity of the external debt from an already low level of six years and seven months to six years and three months, causing refinancing risks that has kept the country at the mercy of foreign creditors; and rise in the floating rate domestic debt from 62% to 68% which is poisonous due to an unprecedented interest rate of 20%.

While thus far we were borrowing from Peter to pay Paul, it must be now well understood that this module of borrow and adjust is working no more. Things have already come to a head, necessitating some out of the box thinking, like relying on indigenous resources and tapping the investment potential of the diaspora.

 

Published in The Express Tribune, April 4^th, 2023.

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