Pakistan’s economic situation has remained in a precarious state since its inception. In 1947, the local economy was facing numerous challenges owing to a lack of adequate financial resources coupled with infrastructural issues.
Over the past many years, the consistent fiscal deficit has gradually enhanced economic vulnerabilities thereby causing a massive fiscal crunch leading to numerous governance issues. The fiscal deficit is usually countered by taking loans from domestic as well as numerous international platforms on huge interest rates.
Read more: Pakistan’s Tale of Two Deficits
Although the economic affairs of the state have always remained in shambles, yet, the Corona pandemic has further slowed down the economic progress. Thus, by the end of June 2020, the total debt of the state has increased sharply and stood at about Rs. 44 trillion which makes it about 106% of GDP.
Economists have expressed huge reservations over the skyrocketing debt trends. It is estimated that at the current rate of borrowing, the total financial liabilities of the state would double by 2035, leading to increased debt unsustainability.
During the last 10 years, the trajectory of both domestic and external debts has remained on a steep path. Stagnant industrial growth, rising rupee devaluation, and unproductive use of debt are some of the factors which led to such a huge public debt. The inefficient tax collection mechanism also added to the economic woes of the state exchequer.
Instead of focusing on strengthening the trade mechanism regionally and globally, increased debt collection remained the primary focus of all governments, derailing the budget even further. The following graph represents the borrowing trend of successive governments from 2010 to March 2020.
The public debt comprises domestic and external loans. As far as Pakistan’s domestic debt portfolio is concerned, it encapsulates long and medium-term permanent debt, floating debt, and other financial instruments launched under National Savings Scheme.
This represents the amount generated by federal and provincial governments through prize bonds, Sukuk bonds, and Treasury bills. It also includes the amount taken as a debt from the State Bank of Pakistan for managing state expenditures.
Read more: Debt free Pakistan – Dr. Farid A Malik
Pakistan’s increased borrowing
As the trajectory of public debt is observed, it turns out that the domestic debt has increased significantly while the external debt has decreased over the past few years. During the 2018-19 era, a massive increase in public debt was observed due to major external debt repayments.
Therefore, for paying about the US $10,000 million, government borrowing for the tenure registered an increase of about Rs. 1754 billion as compared to the previous year.
The external debt resources are used to diversify the debt sources so as to reduce reliance on the domestic market along with the public sector development projects expected to give long-term benefits to the state.
Time and again, Pakistan has borrowed money from various external bilateral sources and multilateral establishments to manage its foreign exchange reserves and initiate different projects meant for social welfare.
The bilateral loans are mostly disbursed by China and Saudi Arabia while multilateral debt is generally acquired through IMF and ADB. Apart from that, loans are also procured through other commercial resources.
In recent years, borrowings from commercial banks have increased. However, the debt from bilateral and multilateral resources is still about 80% of external debt, depicting the increasing debt burden on the exchequer. In order to curtail the economic impact of Covid-19, the government had to take a loan from IMF to augment funding of the development sector.
Impact of annual debt servicing
The most problematic aspect of ballooning public debt is the annual debt servicing which has, in some cases, increased beyond the principal amount borrowed from external and domestic resources.
The economic survey of Pakistan 2019-20 suggests that debt servicing comprises about 48% of state expenditures. In 2019-20 alone, about Rs. 1646 billion were paid as interest on local debt while Rs. 234 billion were paid on external loans.
Due to such high interest rates, more loans are procured to curtail the ever-growing fiscal deficit. Therefore, the state expenditures are carried out at the expense of development projects planned for marginalized segments of society.
A horrendous aspect of such a huge public debt is that a major chunk of government revenue is lost in paying the debt service while the principal amount remains the same.
Thus, the government has to pay this debt service every year. Consequently, the expenditure meant for the social sector including the health and education budget is spent for avoiding the absolute economic collapse of the state.
What needs to be done?
All in all, Pakistan needs to reduce its over-reliance on public debt generated through both domestic and foreign resources.
For this, Pakistan needs to focus on industrial development and foreign remittances. Through industrial development, not only that the net income level would be improved, but the exports of the state would also increase the sustenance level of the economy.
Pakistan is blessed with an ideal geographic location for boosting trade relations on a regional and global scale. Despite the economic implications of Covid-19, Pakistan has managed to increase its exports to a new level by November 2020, thereby playing a significant role in shrinking the trade deficit.
The foreign remittance also remained at an all-time high during this period, registering a surge of about 6.4% during 2020.
These figures may paint a rosy picture of Pakistan’s future, however, long-term financial policies are required to reduce the public debt once and for all. If no one pays any heed to this grave issue, the growing public debt would slowly evolve into a threat to Pakistan’s national security.
Therefore, the government needs to pay special attention to decreasing public debt while increasing funding allocated for social development projects so that the benefits of economic progression are felt by all segments of society.
The author is a Mechatronics engineer turned development enthusiast. She is currently working as a project assistant at the Sustainable Development Policy Institute (SDPI). The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.