Debt and default

The government’s failure to bring some stability to the exchange rate, let alone the economy in general, is among the primary causes of the country’s continual flirtation with default. The finance ministry has recently admitted in a report that the country needs to consistently keep debt below 70% of GDP if it is to reduce the risk to the economy. The debtto-GDP ratio reached 78% at the end of FY2022 and will likely go well past 80% once final numbers are available for this year.

How exactly that ratio will be brought down is anyone’s guess. Meanwhile, the Debt Sustainability Analysis report also says gross financing needs beyond 15% of GDP would be unsustainable. Some reports already put this figure at almost double the target. And while not quite the same thing, FBR estimates suggest that about 70% of government revenue this year may end up going towards debt servicing. The best case scenario is that this is ‘just a blip’ because of the interest rate shock caused by rate hikes at home and abroad.

This brings us back to the need to reduce the debt burden through a combination of economic growth to reduce its size relative to GDP, paying off loans, and debt forgiveness, since foreign debt is over 37% of the total. The problem is figuring out policy measures that can bring about the first two, while upping our diplomatic game to achieve the third. Even in the government’s own best-case scenarios, by the target year of 2026, gross financing needs will be closer to about 19%, and the debt-to-GDP ratio will be over 63% — under the ceiling but still well above the 55.2% ceiling set by the Constitution.

And if that were not enough, the best-case projections assume an economic turnaround with indicators that the government has never achieved, including balancing the budget — or at least restricting the deficit to 0.2% — and sustaining economic growth at above 3.5%. Things have gotten so bad that even our best-case scenarios are not about prosperity, but just less disappointment.