We need not worry about the debt scenario to the extent that it is being portrayed in Pakistan. There is almost a debt fetishism taking place in Pakistan where we spend all our time focusing on the negative side of debt. The present debate on public debt is divided into two extremes; one which presents a doomsday scenario and the other which says there is nothing-to-worry about.
The doomsday camp, argues that the current government has borrowed more than US$35bn during its term. Public debt has soared and the debt-to-GDP ratio has swollen up to almost 68%, which is beyond the so-called safety limits of 60% for developing countries. The trade deficit is widening, exports are falling and liquidity constraints are worsening.
The present debate on public debt is divided into two extremes; one which presents a doomsday scenario and the other which says there is nothing-to-worry about.
The country is falling into a debt trap and insolvency is the outcome. On the other hand, the nothing-to-worry about the group which follows the imports substitution growth model says that CPEC led imports and infrastructure investments explain widening deficit and rising debts. Hence, they believe that the current balance of payment and debt problems don’t matter.
In my view Pakistan is not going to be insolvent – it has the capacity to pay back the debt. Factually, the debt has contributed positively both towards economic growth and capital formation – the latter has increased by $13bn during this period. Reporting absolute numbers of debt by themselves is misleading and leads to overstretched conclusions regarding the debt crisis, debt trap, and insolvency.
Current debt servicing is low by historical standards. Short-term debt in Pakistan is decreasing over time and reserves as a ratio to short-term debt have also improved over time. These are important because they indicate how stressed the situation can get if a country is denied further borrowing.
A higher ratio indicates improvement. This ratio increased to 48% in 2016 from 4% in 2011 showing a 12 times increase. Conversely, short term debt to reserves ratio for Pakistan has declined from 70% in 2013 to almost 20% in 2016.
Public debt has soared and the debt-to-gdp ratio has swollen up to almost 68%, which is beyond so-called safety limits of 60% for developing countries.
Both measures indicate improved debt repayment capacity in the short run. In 2017, the short-term external debt stands at 5.5% of reserves. Furthermore, Pakistan now needs to pay only one-fifth of its export earnings to meet external debt servicing as compared to one-third of it in 2013-14.
Domestic debt recorded 43.86% growth during 2013-17 as compared to 32.4% between 2008 and 2012. However, domestic borrowing is a major source to finance deficits across all developing countries, due to lower interest rates and lower inflation. In Pakistan, decreasing interest rates from 11% in 2012 to 5.75% has resulted in higher domestic borrowing.
Given the future economic outlook and global credit market credibility, Pakistan has the capacity to honor its future debt obligation, even without going to IMF. Recent offers of US$ 8 billion for euro and Sukuk bonds and low-interest rates on short-term bonds, such as 5.625% on the 5-year bond, demonstrate that investors do have trust in the economy.
However, to manage its debt better, Pakistan does need to closely track its balance of payment problem. A structural shift of moving from import substitution to export promotion as a growth framework is a fundamental prerequisite. A well-designed export-led growth strategy is the key to managing public debt in the long run.
Dr. Sajid Amin is Research Fellow and heads Policy Solutions Lab at Sustainable Development Policy Institute Pakistan. Prior to joining SPDI, he was Senior Research Fellow and Assistant Professor at Department of Economics, Pakistan Institute of Development Economics (PIDE). Dr. Sajid’s research is located at the cutting edge of issues related to economic growth and sustainable development. Dr. Sajid is also visiting faculty at PIDE, COMSATS and National Defense University. Dr. Sajid sits in multiple public-sector committees including working group on Economic Governance and Institutional Reforms of Planning commission of Pakistan, working group on promoting remittances inflows and social science research thematic grant committee of Higher Education Commission Pakistan.