Looming crisis: Country twice as indebted as in June 2008

Latest statistics show country’s debt has mushroomed to Rs12.37 trillion as of end August 2012.

ISLAMABAD:

The federal government’s debt obligations have almost doubled during the tenure of the incumbent government: latest official statistics show that the country’s debt has mushroomed to Rs12.37 trillion as of end August 2012.

Furthermore, the total debt figure is exclusive of a $7.4 billion loan from the International Monetary Fund (IMF), according to the State Bank of Pakistan. The IMF loan will be repaid out of the central bank’s foreign currency reserves, thus having no bearing on the national budget.

In June 2008, the central government’s total debt stood at Rs6.1 trillion. Over the next four years and two months, a sum of Rs6.3 trillion has been added to the centre’s debt: it currently stands 103% higher than the level in June 2008. The sharp rise in the debt burden has been attributed to rupee depreciation and large budget deficits incurred due to heftier power subsidies and interest payments on debt stock.

For the current fiscal year, the government has estimated spending of Rs1.2 trillion in servicing debts and repaying foreign loans, according to the finance ministry.

The amount to be spent on debt servicing and foreign loan repayments is roughly half of projected tax revenues for the current fiscal year, which indicates significant stress on the budget due to reckless domestic borrowing. The debt servicing-to-tax revenues ratio is significantly increasing, restricting the breathing space for additional spending on provision of social services. As of the end of the last fiscal year, this ratio stood at a staggering 40%.

Currently, the government is financing development projects by borrowing money from commercial banks and printing more currency: the means adopted are not only inflationary, but are also adding to the debt burden indirectly as well.

Officials admit to the seriousness of the short-term implications of rising indebtedness. They say that ballooning debt has heightened the risks of refinancing the debts already held. The finance ministry’s senior officials say the real challenge in debt management is reducing the government’s short-term financing needs. But concrete plans to reverse the trend have yet to materialise.

A recent report released by the IMF warns of similar implications. The IMF has forecasted that the country’s gross financing needs for the current fiscal year will come to about 31% of GDP, which comes to roughly Rs7.4 trillion. According to the SBP, short-term borrowings have risen to Rs4.13 trillion as of end August 2012 – an increase of Rs2.5 trillion or 152.4% since June 2008. Due to the massive increase in short-term debt, the government’s dependence on commercial banks has increased manifold. Short-term debt now accounts for nearly 53% of the total domestic debt.

Meanwhile, domestic borrowing has increased to Rs7.8 trillion since 2008 – a sharp surge of 137.8% or Rs4.5 trillion. External debt during the last four years has also risen by almost 65%. As against external obligations of Rs2.8 trillion in June 2008, the central government’s total external debt (excluding the IMF loan) has now swelled to Rs4.6 trillion according to the central bank.

Ministry of Finance officials say that international lending agencies’ reluctance to give fresh programme loans without a letter of comfort from the IMF is behind the comparatively slow growth in foreign loans. International lending agencies like the Asian Development Bank and the World Bank are urging the government to implement meaningful reforms aimed at getting the economy back on track.

Meanwhile, depreciation of the Chinese yuan against the US dollar also helped the total external debt at lower ends, as most of the ADB’s loan is yuan-denominated. However, these gains have largely been squared off due to the depreciation of the Pakistani rupee against the greenback.

Published in The Express Tribune, October 31^st, 2012.