Debt servicing
Editorial

Debt servicing

According to the latest figures released by the State Bank, the government paid Rs598 billion in domestic debt servicing in July-November 2017, registering a year-on-year growth of 11 per cent. The report said domestic debt increased by Rs917bn in July-November compared to Rs652bn in the same period of the preceding fiscal year. Total debt stocks rose to Rs15.76tr at the end of November. The Federal Board of Revenue collected Rs1.3tr in taxes in July-November, up 20pc from a year ago. Funds for domestic debt servicing are raised through borrowing from banks and the central bank. This further increases the burden of debt servicing each year. In 2016-17, the government had to pay Rs1.2tr in domestic debt servicing, which was more than development as well as defence expenditures.

Growing debt servicing is a sign of increasing debt stocks as the government relies heavily on borrowing for budgetary support and development expenditure. In the latest monetary policy statement, the SBP said the fiscal deficit for July-December is expected to be around the last year’s level of 2.5pc, indicating the gap would be within the target. However, the increase in debt servicing can widen the fiscal deficit. Five-month debt servicing is about 60pc of development expenditures whose target for 2017-18 is a little over Rs1 trillion. The report said debt servicing was 30.4pc of tax revenue in the last fiscal year. The government usually slashes development expenditures to keep the fiscal deficit within the target while debt servicing takes away the largest share from revenues. The five-month trend suggests that debt servicing for 2017-18 will be around Rs1.4tr, which is large enough to make the government miss its annual fiscal deficit target.

Pakistan’s capacity to repay external debt and liabilities has weakened significantly in the past four years and its foreign debt obligations are now equal to 162% of annual foreign exchange earnings – the highest ratio in the past one decade. This is a matter of serious concern for the State Bank whose reserves are also dwindling fast. It may be recalled here that external debt and liabilities amounted to 121.3% four years ago. The external debt servicing in relation to the annual foreign exchange earnings has also gone up to 16% in four years. In 2013, the ratio was 13%. The external debt servicing is now eating up roughly 30% of Pakistan’s export receipts against slightly over one-fifth four years ago.

The country’s public debt is now touching dangerous levels. In 2013, when the PML-N government came to power, the gross public debt stood at Rs14.3 trillion or 63.8% of gross domestic product (GDP). In just four years, it has grown to Rs21.4 trillion or 67.2% of GDP. However, the major concern remains the external debt. What is especially worrying is that most of the short-term external borrowings were secured at the floating exchange rate which could be a big source of vulnerability due to any fluctuation in interest rates. The government lost all economic gains of the first three years of its government in the fourth year.

Trends suggest that budget deficit by the end of current fiscal year would be even higher than 5.8% of GDP recorded in the previous fiscal year. It is also anticipated that the current account deficit would cross $16 billion in the current fiscal year, which is $6 billion higher than official estimates. In the given circumstances, financial experts recommend the adoption of a new debt management strategy. They emphasise the need for proactive management of the external account with focus on the external debt of $83 billion. Another urgent need is consistency in economic policies necessary for bringing down the level of external debt and liabilities as a percentage of foreign exchange earnings.

About the author

Mian Bilal