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The PTI government claims to have paid off record debt. It’s correct. Over the past three years, external debt repayments have amounted to nearly 3.5 trillion rupees, more than ever before.
PML-N says PTI has added a lot more to debt in three years than it has in five years. This is also correct. While the PML-N government has added Rs 10.6 trillion to the gross public debt from 2013 to 2018, the PTI government has added Rs 13 trillion so far (until March 2021). But it should also be mentioned that the PPP government only added 6.5 trillion rupees to the gross public debt from 2008 to 2013.
The point is, all parties choose numbers that suit their narrative, but the real story is somewhat different.
The face value of debt can be misleading. What really matters is gross public debt as a percentage of GDP.
The 2005 Fiscal Responsibility and Debt Limitation Act capped public debt, limiting it to 60% of GDP. However, in 2013, the PPP government exceeded the cap by adding 5 percentage points, bringing it to 63.8% of GDP. The PML-N government has added another 8.2 percentage points, while the PTI government has so far added 9.3%, bringing the gross public debt to 81.4% of GDP.
How is it that the PTI government has added so much debt in less than three years? The massive devaluation, which the government was forced to make in the wake of an artificially overvalued exchange rate, explains much of the debt build-up. Immediately after devaluation, the net increase in debt slowed down and gross government debt as a percentage of GDP began to decline.
From June 2018 to June 2019, the rupee devalued by 34%, from Rs 121 per US dollar to Rs 162, while the gross public debt increased by 19 percentage points, reaching 86% of GDP.
But since June 2019, our gross public debt has actually fallen by almost 5% of GDP. This is largely due to the fiscal discipline imposed by the government and the targeted reduction in the primary deficit. But the real test of the PTI government begins now, where it faces a difficult choice between expansionary fiscal policy fueling growth but with an increasing level of public debt versus fiscal discipline with continued debt reduction with modest growth. Achieving the ambitious goal set for RBF will also play a role.
The history of debt is not that hard to understand. Domestic debt is nothing more than the accumulation of the budget deficit over the years, while the external debt is the accumulation of the current account deficit. Interest payments further aggravate the outstanding debt, and as the government struggles to repay the principal, previous debts are rolled over.
No political government is limited to overspending (unless pushed by the IMF), because any tax cushion it creates would only benefit the next government. This twisted political economy creates perverse incentives for each government to play its part in perpetuating Pakistan’s debt crisis.
The country has now reached a stage where it must not only borrow to run the government, but also to service the previous debt. In 2020-2021, the federal government had net revenues of 3.7 trillion rupees, but paid 4.3 trillion rupees in the form of mark-ups and repayment of foreign loans. It is financially unsustainable but politically insoluble.
The only way to ease Pakistan’s debt burden is to widen the tax net and reduce circular debt, pension liabilities, losses of state-owned enterprises, and most importantly, unproductive civilian and military government spending. .
Posted in The Express Tribune, July 6e, 2021.
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