Government estimates public debt to skyrocket thanks to high interest rates

ISLAMABAD: The Ministry of Finance came forward to explain the reasons for the increase in public debt over the past three years and explained that the rise in interest rates has led to a sharp increase in debt service which consumed 7,500 billion rupees, we learn.

The depreciation of the exchange rate, the financing of the primary deficit and the cash management plan have also increased public debt.

It is relevant to mention here that Pakistan’s total public debt and liabilities swelled to 47.8 trillion rupees until June 30, 2021 from 29.6 trillion rupees at the end of June 2017-2018, when the government led by the PML (N) had completed its five-year term. to reign.

Public debt and liabilities stood at Rs 6 trillion at the end of Musharraf’s reign in 2007-08. Then the PPP ruled over the next five years and they rose to 14 trillion rupees. Then the total public debt jumped by 14.6 trillion rupees and rose to 29.6 trillion rupees at the end of the PML (N) rule in 2017-18.

In the last three years of the PTI-led government, total public debt and liabilities have increased by at least Rs 17.8 trillion, making it the largest ever increase in the debt burden. over a three-year period.

However, the finance ministry in its statement said it was in response to some media reports regarding the increase in public debt over the past three years, while those media reports ignored the underlying reasons. of this increase.

Therefore, in order to fully understand the underlying economic realities, it is necessary to analyze the sources of the increase in total public debt over the past three years:

The preference for short-term domestic borrowing in the absence of adequate liquidity reserves resulted in a short-term profile of domestic debt at the end of fiscal 2018. This short-term profile resulted in interest charges. high on debt, as interest rates had to be raised significantly to curb mounting inflationary pressures. The government paid 7.5 trillion rupees in interest service, which accounts for 50% of the increase in total public debt.

The exchange value of the rupee has been kept at an artificially high level in the past, which triggered the balance of payments crisis. The transition to a market-based exchange rate regime, being an inevitable policy choice, resulted in a sharp depreciation of the exchange rate resulting in high inflation, high interest rates, slower GDP growth and a decline. tax revenue related to imports. This exchange rate depreciation added about Rs.29 trillion (20% of the increase) to government debt. It is important to stress here that this increase was not due to borrowing but to the revaluation of the external debt in rupee terms after the devaluation of the currency.

The impact of the economic slowdown due to the Covid-19 pandemic has mainly resulted in higher than expected primary deficits and around 3.5 trillion rupees (23% of the increase) has been borrowed to finance the primary deficit. As much as Rs 1.0 trillion (7% of the increase) was due to increased government cash balances to meet emergency needs as well as the difference between face value (which is used for l ‘recording of the debt) and the amount realized. value (which is recorded as budgetary revenue) of government bonds issued during this period. The government took the revolutionary and economically sound step of not borrowing from the SBP and maintaining a cash reserve, which led to a one-time increase in debt. However, this increase in debt was offset by a corresponding increase in the government’s liquid cash balances.

A better way to measure the level of debt is to use the debt-to-GDP ratio instead of looking at the absolute values ​​of debt. With this in mind, it is important to point out that Pakistan experienced one of the smallest increases in its debt-to-GDP ratio during the pandemic. The global debt-to-GDP ratio increased by 13 percentage points, while Pakistan’s debt-to-GDP ratio registered a minimum increase of 1.7 percentage points in 2019-2020.

Pakistan’s debt-to-GDP ratio has in fact been reduced by 4 percentage points, indicating a lower debt burden at the end of June 2021 compared to the previous year.

To conclude, the increase in debt over the past three years has occurred mainly in the 2018-19 fiscal year due to the implementation of difficult and unavoidable policy choices. If the market-based exchange rate, a sustainable level of current account deficit, adequate liquidity reserves and a long-term domestic borrowing profile had been maintained, the debt burden would have been further reduced through the efforts. fiscal consolidation supported by aggressive spending controls and growth in tax and non-tax revenues.

As most of the major adjustments in fiscal and monetary policies have been made, the debt burden is expected to decline sharply over the next few years, the statement concludes.

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