Thickening debt pile

In one of the fastest monthly climbs ever, Pakistan’s public debt shot up by Rs1.73 trillion in a single month, pushing the total to an eye-watering Rs67.8 trillion as of May 2024. This surge is particularly baffling given the stability of the rupee against the dollar during the same period. Typically, such significant debt hikes are linked to severe currency fluctuations. But this anomaly seems to hint at some serious issues in the government’s fiscal operations and debt management policies.
A deeper dive reveals that the domestic debt is the main culprit behind this surge, ballooning to Rs46.2 trillion and rising by Rs7.12 trillion in just one month. This increase has not resulted merely from necessary fiscal operations, but rather suggests budgetary misalignment. The government’s borrowing far exceeded the requirements for financing its fiscal operations, leading to a costly rise in interest payments. The National Assembly’s decision to allow the government to borrow Rs33.8 trillion for debt repayment and servicing this year further exacerbates the issue. Except for the Rs9.8 trillion interest cost that is included in the budget, the rest will be borrowed directly from domestic and foreign markets. Similar misalignments in other sectors remain, such as the persistent issue of circular debt in the power sector. Despite tariff increases aimed at containing this debt, it surged to Rs2.655 trillion by the end of May, surpassing the IMF’s permissible limit by Rs345 billion. It seems the incumbent government has continued down a familiar path of borrowing and spending without strategic investment, and a clear break from past fiscal mismanagement is yet to be witnessed.
Pakistan’s best bet lies in tapping into possible potentials, particularly by creating a conducive environment through political stability and security strengthening to attract investors and bolster foreign exchange reserves. While conventional fixes such as fiscal tightening, boosting exports, tax reforms and sectoral adjustments are evident, an out-of-the-box solution is required to turn the country’s economic trajectory around.