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Combating debt liabilities; a serious challenge for the Govt | MG Opinion

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November 26, 2018 (MLN): Pakistan’s external and domestic debts are growing at an threatening stride for the last ten years (2008- 17) owing to fiscal profligacy on one hand, and substantial decline in non-debt creating inflows as well as a decline in exports, on the other.

The speed at which the governments have borrowed during the past years, has caused serious alarm in various circles as it is considered to be something that is posing a serious threat to national security.

The recent rate of accumulation of debt suggests that, if left unchecked, Pakistan’s public debt in general and especially external debt would reach an unsustainable level in the next years. The size of the external debt in particular would be too large for Pakistan to service its external debt obligations in an orderly manner.

Apart from the direct consequences for national security, rising debt is also a threat to Pakistan’s macroeconomic stability and hence to growth, employment generation and poverty. It is well-known that high and rising debt depress investment by increasing uncertainty.

As the size of the public debt increases, there is a growing uncertainty about the actions and policies that the government will resort to in order to meet its debt service obligations, with adverse effects on investment.

Under these circumstances, potential private investors will prefer to divert their activities towards quick return investment rather than long-term, high risk and irreversible projects.

Rapid accumulation of debt can also be accompanied by increasing capital flight if the private sector fears the imminent threat of devaluation and/or increases in taxes to service the debt obligation.

In short, high and rising debt constitute a serious threat to economic prosperity. It acts as major impediment to investment and growth and hence to employment generation and poverty alleviation.

Central Government’s Total Debt

Government’s total debt from the year 2015, showing an increasing trend. Central government debt during the month of September 2018 increased by 0.0046% as compared to previous month and stood at RS 24732 billion.

Pakistan’s Domestic and External Debt

The government has been actively trying to bridge the gap in twin deficit, where much has been said and acted upon broken external imbalances, however the fiscal side of the equation remains unaddressed. Government’s Domestic debt during the first quarter of FY2018-19 reached to RS 16919.8 billion (68% of government’s total debt), while domestic debt reached to RS 7812.2 billion (32% of government’s total debt).

At the end of December 2017, Pakistan’s external public debt was $70.51 billion, which went up to $75.35 billion at the end of June 2018. In FY18, $5.62 billion was spent on foreign debt servicing.

Source: Pakistan’s debt situation 2007-2017

Owing to dollar appreciation, Pakistan’s debt as well as debt servicing cost will go up in the current fiscal year even if no fresh loan is taken. The increase in debt may encourage capital flight as investors fear a backlash from the government.

Suggested policy Implications

However, in the wake of interest rate surge in the US, developing countries like Pakistan will have to offer higher interest rates plus risk premium to attract foreign capital.

As government’s debt mainly increased due to fiscal deficit, balance of payments requirements and rupee depreciation against the dollar, government has to emphasize on obtaining concessional and long-term external financing to avoid higher debt servicing

Reducing the public debt to GDP ratio to 50 percent through increasing tax revenue and expenditure management.

Government will have to increase revenue mobilization by bringing agriculture and services sector under the tax net and implement measures to curtail tax evasion.

Effective exchange rate management and effective fiscal deficit is the key to ultimately managing our debt situation effectively.

World economies are now moving from low interest rate to tightening of their monetary policy (high interest rates). Same would be the response of domestic economy. So, in years and even months to come, we would be in much difficult situation with increased interest rate in international market.

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Posted on: 2018-11-26T14:19:00+05:00

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