Toll of rising debt

Rising foreign debt costs due to rupee crash, and higher domestic interest rates combat inflation

Interest payments on the country’s massive domestic and foreign debt load now account for over 90% of all government expenditure, an astounding amount that illustrates the true impact of devaluation and inflation over the past several months. Debt servicing costs rose 45% in the first quarter of the current fiscal year and are now almost equivalent to all federal income available after the disbursal of provincial shares. The huge increase is due to the rising cost of foreign debt repayment due to the rupee’s crash and the increased interest due on domestic borrowing because of record-high interest rates set by the State Bank to counter backbreaking inflation.

While the country has overcome some of these issues, loosening some of the extreme trade restrictions will cause the trade deficit to rise again, creating an increase in the need for dollars and potentially causing the rupee to decline, albeit at a more manageable rate. And while significantly cutting the interest rate — as is expected — will likely bring new investment and increase economic activity, resulting in higher government revenue, these are also drivers of inflation, meaning that persistently high inflation will remain that way. While the State Bank may project a “substantial decline” in inflation in the coming months, even halving the figure from the peak of over 30% leaves us with an unacceptable figure.

Reducing the government’s debt-to-income ratio will still take a long time, and with IMF restrictions on deficit spending, it will be difficult to restore, let alone increase, spending on critical services and infrastructure such as health and education. While it is possible for the government and IMF to come to an understanding that allows for a little more wiggle room on some forms of public spending, we are not getting our hopes up. More likely, we are in for several years of low spending to balance the budget, and several more of suffering due to the problems that underinvestment in health, education and infrastructure will create.

Published in The Express Tribune, November 3^rd, 2023.

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