The latest estimate of Pakistan’s government debt outstanding by the SBP (State Bank of Pakistan) as of end March 2022 is a staggering 44.4 trillion rupees. Indeed, every citizen of Pakistan is indebted up to Rs 200,000. Almost six years ago, in June 2016, the level of public debt stood at 19.7 trillion rupees. Therefore, the cumulative increase over this period was 125%.
The SBP defines public debt as consisting of domestic and external public debt and debt to the IMF (International Monetary Fund). This definition is used to project the level of public debt at the end of June 22. The budget deficit in the fourth quarter of 2021-22 is estimated at Rs 2.142 billion. The increase in the rupee value of external debt from end-March to end-June is added to the fiscal deficit to arrive at an estimate of total government debt outstanding at the end of 2021-22. The resulting estimate of the level of government debt is 49.1 trillion rupees at the end of June 2022.
The increase in public debt in 2021-22 is unprecedented. There was a quantum leap of 9.2 trillion rupees in one year, the highest on record. The rate of increase is as high as 23 percent. The last time there was also a large absolute increase in public debt was in 2018-2019, when it jumped by 7.8 trillion rupees, with a growth rate of 31%.
The extraordinary increase in public debt during these two years is due to two factors. First, a relatively large federal budget deficit necessitated larger borrowings. The federal budget deficit in 2018-19 was at the highest level of 8.9% of GDP. It was also relatively high in 2021-22, at 7.8% of GDP, according to revised estimates.
Second, the rate of depreciation of the rupee was higher in 2018-19 and 2021-22, at 33.5% and 30%, respectively. Consequently, there have been large increases in the rupee value of external public debt.
The evolution of the public debt-to-GDP ratio since 2015-16 has been exceptionally rapid. It stood at just over 60% of GDP at the end of 2015-2016. By the end of 2019-20, it had reached an all-time high of nearly 76.6% of GDP. Thereafter, it fell to 71.5% of GDP in 2020-21, when the value of the rupee remained, more or less, nominally stable. However, it started to rise again. The provisional estimate of the public debt-to-GDP ratio at the end of 2021-22 is 73.3% of GDP.
Fortunately, the rebasing of GDP from 2005-06 to 2015-16 implied a much lower public debt-to-GDP ratio. For example, the new estimate of GDP at current prices is 17% higher. Consequently, this reduced the public debt-to-GDP ratio to 73.3% of GDP from 85% of GDP in 2021-22 in the absence.
The sharp rise in the public debt to GDP ratio over the past six years has led to a serious breach of the Fiscal Responsibility and Debt Limitation Act 2005. According to article 3 of the law, starting from the financial year 2016-17, the total public debt will be reduced to sixty percent of the GDP. It was close to 60% of rebased GDP in 2016-17. However, it now stands at around 73.3% of GDP, as shown above. This is a very big violation of the law.
The current government recently tabled major amendments to the Financial Responsibility and Debt Limitation Act before the Standing Committee on Finance and Revenue of the National Assembly. The amendments now provide for the public debt-to-GDP ratio to be reduced to 60% of GDP by 2026-27. This objective must be achieved by reducing the ratio by at least 2% of GDP each year from 2022-23. The Committee approved the proposed changes.
The federal government’s targeted budget deficit in 2022-23 is 4,547 billion rupees, or 5.8% of projected GDP. If the depreciation of the rupee can be contained to close to 15%, then with a jump of more than 22% in nominal GDP, it will be possible to reduce the public debt-to-GDP ratio by 2 percentage points in 2022-23.
However, this requires a sharp reduction in the federal budget deficit from 7.8% of GDP in 2021-22 to 5.8% of GDP in 2022-23, based on rapid revenue growth of 24% and only d a small increase of 2%. in current expenditure. Both of these objectives will be extremely difficult to achieve. Moreover, the rupee will be under pressure throughout the year given the low level of reserves. Despite some recovery last week, it is still down more than 7% since the end of June 2022.
The Fiscal Responsibility and Debt Limitation Act also requires the federal government to include a medium-term budget statement in the annual budget statement that must be tabled in the National Assembly each year. This has been done for 2022-23.
The three-year projections are extremely ambitious and, like previous statements, go beyond the realm of possibility. RBF’s tax-to-GDP ratio is projected to increase by 0.8% of GDP by 2024-25. The overall deficit is to be reduced by 4.2% of GDP over these years. This implies that spending will have to be cut by more than 3% of GDP. In the face of a rapidly rising cost of servicing debt, this is extremely unlikely. In accordance with the agreement with the IMF, the primary deficit of 2.4% of GDP in 2021-22 must be converted into a surplus of 0.2% of GDP in 2022-23 and a surplus of 1.8% of GDP by 2024-25.
The bottom line is also missing in the medium-term budget statement as to the target level of the public debt-to-GDP ratio until 2024-25. This should guarantee an annual decline in the ratio of 2% of GDP over the next three years.
Overall, Pakistan’s public debt to GDP ratio has soared to over 73% of GDP over the past six years. This is a strong questioning of the quality of public finance management. We can only hope and pray that it will be cut by at least 2% of GDP every year for the next five years to bring it back to the upper limit of 60% of GDP imposed by the Fiscal Responsibility Act. and debt limitation. .
Copyright Business Recorder, 2022