FM warns of unsustainable debt

Says tackling debt position should be 'top priority' of reform agenda

ISLAMABAD:

Finance Minister Dr Shamshad Akhtar raised a stark warning on Thursday, declaring Pakistan’s debt as “unsustainable.” In a public address in Islamabad, Akhtar highlighted the urgency of addressing this critical issue, stating that the country is also finding it challenging to secure new foreign loans and is effectively priced out of international markets.

Speaking at an event organised by the Sustainable Development Policy Institute, Akhtar underscored that tackling the issue of the “unsustainable debt position” should now be the “top priority” of the nation’s reform agenda.

“Vulnerability has increased due to the unsustainable debt position, with Pakistan in breach of the Fiscal Responsibility and Debt Limitation Act since 2013,” said the finance minister – a move with potentially far-reaching implications. She delivered a keynote address at the event.

Pakistan’s current $3 billion International Monetary Fund (IMF) programme operates under the assumption that the country’s debt is sustainable, with adequate resources to service it. Akhtar highlighted that large fiscal and trade deficits over two decades have weakened the debt position, with the cost of servicing debt reaching three-quarters of Federal Board of Revenue (FBR) revenue in fiscal year 2023.

“The vulnerability of the economy has increased to global economic shocks such as the increase in international commodity prices and tighter liquidity conditions, with Pakistan effectively priced out of the international credit markets,” she added.

Addressing the unsustainable public debt became the top priority of the reform agenda, according to Akhtar. She also termed Pakistan’s fiscal policy unsustainable, not just due to revenue gaps and unproductive expenditures but also because of the scale of the climate funding gap.

The Express Tribune reported last week that the IMF has projected that Pakistan’s public debt, including publicly guaranteed debt, may increase to Rs81.8 trillion, or 77.3% of gross domestic product (GDP) by the end of the current fiscal year in June 2024.

Managing public debt will require a significant focus on reforms to enhance resource mobilisation and contain unproductive expenditures, including state-owned entities (SOEs) losses, with a particular focus on the energy sector, Akhtar stated.

Read: Govt debt may soar to Rs81.8tr

She noted that Pakistan’s debt structure is marred by “numerous complexities” that need to be addressed between Pakistan and its creditors. On the external debt side, Akhtar highlighted limited options. The bulk of Pakistan’s external debt, 44%, is with multilateral agencies and cannot be re-profiled due to their preferred creditor status.

Commercial debt constitutes 14% of external debt, and re-profiling this portion is difficult due to the involvement of a large number of stakeholders and a cumbersome process. Bilateral debt accounts for 35% of external debt and is an area where the government has already benefited from the G-20 debt relief initiative post-COVID-19.

The finance minister mentioned the restructuring of $2.4 billion Chinese debt, extended by the Exim bank, which Islamabad availed in August this year. She highlighted Pakistan’s huge growth potential, requiring structural reforms, citing a World Bank report projecting the economy to reach $2 trillion by 2047.

Macroeconomic stability, critical to addressing deep-rooted challenges, has become more difficult in the last decade due to a myriad of endogenous issues, delays in structural reforms, protracted actions, and exogenous shocks, Akhtar observed. She stressed the need for across-the-board strengthening of fiscal and financial management and a complete overhaul of the government’s fiscal apparatus.

Lowering the revenue-GDP gap on a sustainable basis is imperative, with a 10% tax-to-GDP ratio deemed unsustainable, she added. Large fiscal deficits are financed through domestic and external loans, and amid the current global situation, securing higher levels of inflows from abroad is harder, revealed the finance minister.

Read more: Govt set to secure massive domestic borrowing of Rs11.04tr

“We have already started re-profiling domestic debt and moving to longer tenor instruments for substantially reducing the government’s cost of borrowing over the period,” said Akhtar. However, she acknowledged that debt cost reduction cannot happen overnight with the current policy rate of 22%.

These measures have helped stabilise the economy, restore confidence in the markets, and signs of economic recovery are evident, with GDP growth estimates ranging from 2% to 3%, said Akhtar. The Pakistan Bureau of Statistics (PBS) projected a 2.5% GDP growth in fiscal year 2024, up from 0.3%, driven by higher agriculture output and a pick-up in manufacturing.

Akhtar highlighted improving business and investor confidence, citing a 16% rally in Pakistan’s international bond markets over the last three months. She pointed out that Pakistan’s manufacturing, export, and agriculture focus on a narrow basket of products and have failed to penetrate new markets.

Growth must be driven by higher exports and increased investments, as getting revenue targets moved up amid GDP growth volatility is challenging, said the minister. After months of hard work, Pakistan reached a staff-level agreement with the IMF, a positive development for the economy ensuring macroeconomic stability.

“We stand committed to the programme because it has all the elements that should be the homegrown agenda of Pakistan,” Akhtar stated. The government is working towards the separation of tax policy and tax administration functions to remove the apparent conflict of interest in tax collection. Similarly, Customs is being reformed to separate tariff policy from the collection functions.

The Express Tribune reported this week that the prime minister did not approve the Akhtar-led committee’s restructuring plan of the FBR and has reconstituted the FBR reform committee. The finance minister further stated that the government has initiated a dialogue with the provinces for sharing expenditures on BISP and PSDP projects falling under the domain of provinces. A review is being conducted to close departments at the federal level for devolved subjects, she added.

Published in The Express Tribune, November 24^th, 2023.

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