An official document reveals that the federal government is carrying a debt burden of Rs14.5 trillion above the statutory limit set by Parliament, poorly implementing the debt management strategy. The skewed Debt Policy Statement 2024 from the Ministry of Finance discloses that during the fiscal year 2022-23, the federal government violated the Fiscal Responsibility and Debt Limitation Act and failed to implement the Medium-Term Debt Management Strategy.
The Ministry of Finance is legally obligated to prepare this statement annually, but amidst a rapid deterioration of the country’s debt situation, critical information is being deleted from the report, compromising transparency. The finance ministry, in comparison to the previous statement, has omitted details regarding the review of public debt, analysis of external public debt inflows and outflows, currency movement and revaluation impact, gross financing needs, and recent updates and developments.
The spokesman of the finance ministry did not respond to whether the instructions to omit details were from the finance minister, finance secretary, or an action of the Debt Policy Office. Despite public declarations of Pakistan’s debt being unsustainable by the finance minister and the International Monetary Fund stating a narrowed path to debt sustainability, crucial information is being concealed from a report intended for the federal cabinet and the country’s parliament.
The Debt Policy Statement evaluates the federal government’s debt policies against the principles of sound fiscal and debt management and the debt reduction path. According to the report, “Pakistan’s Debt to GDP ratio stood at 74.8% at the end of June 2023 compared with 73.9% a year earlier.” Under the law, the Ministry of Finance was required to keep this ratio at 57.5% of GDP, breaching it by an alarming margin of 17.3% of GDP or Rs14.5 trillion.
Exceeding the debt burden by Rs14.5 trillion, standing at Rs62.9 trillion, means the country has virtually nothing in hand after paying the cost of interest on the total debt burden. Under the law, the debt burden should not have exceeded Rs48.5 trillion. During the first half of the current fiscal year, the government paid Rs4.22 trillion in debt servicing costs, surpassing the net income of Rs4 trillion of the Centre, according to the finance ministry.
The report indicates that the total public debt was recorded as Rs62.9 trillion at the end of June 2023. Out of this, domestic debt was Rs38.8 trillion, and external debt was Rs24.1 trillion. The finance ministry attributes the increase in total public debt to higher government borrowing needs to finance the federal fiscal deficit and depreciation of the Pak rupee against the US dollar.
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The external public debt was $84 billion at end-June 2023, witnessing a net reduction of around $4.8 billion during the year due to the suspension of foreign loans in the aftermath of disruptions in Pak-IMF relations. The government repaid international commercial bank loans to the tune of $5.9 billion in the previous fiscal year. The inflows from international commercial banks, mainly representing refinancing of maturities, amounted to $3.5 billion. The government also repaid international Sukuk amounting to $1 billion.
Despite these challenges, successive governments have been violating the FRDL Act, which has been amended multiple times. There has not been much focus on addressing the reasons causing higher public debt.
The finance ministry failed to ensure the debt sustainability of the country by reducing currency risks, refinancing risks, and interest rate risks, according to the report. The share of external debt in total public debt increased from 37% in the preceding fiscal year to 38% in the last year, heightening currency risks when the rupee is sinking and foreign countries are reluctant to give loans.
The Debt Policy Statement showed that the average time of maturity of domestic loans significantly worsened, dropping from three and a half years to 2 years and 8 months maturity. This was riskier and would keep the country dependent on commercial banks exploiting the situation. Despite the shortened debt maturity, the finance ministry opted to delete the information of gross financing needs from the Debt Policy Statement.
The finance ministry stated that lower than budgeted external inflows exerted pressure on borrowing from the domestic market. Furthermore, the rising interest rate environment has increased the demand for short-to-medium tenor debt instruments in the domestic market. Resultantly, the average time to maturity of domestic debt decreased, falling below the minimum threshold of 3 years, as stated in the report.
The report also revealed that the average time of maturity of external debt slightly increased from six years and two months to six years and four months. The improvement was mainly due to the retirement of short-term commercial loans, realisation of new external inflows at a longer tenor, and running-off of the external debt portfolio.
The fixed-rate debt also reduced from 26% to 20.4%, increasing interest rate risks, bordering the minimum level of 20%. The government achieved its target of increasing the share of Islamic finance from 8.6% of domestic debt to 9.1%, beating the target.
