February 9, 2021 (MLN): The government failed to achieve its target of decline in public debt to GDP ratio to 84%, rather it rose to 87.2% of GDP in fiscal year 2019-20 compared to 86.1% in FY19.

In the Debt Policy Statement of 2020-21 which had been presented before the National Assembly lately, the government claimed that on the back of strong growth in revenue and strict control on current expenditure, the Debt to GDP ratio was expected to decline to around 84%, however, Covid-19 adversely affected the economy and slowed down the reforms program, resulting in higher than anticipated Debt to GDP ratio.

It further maintained that based on prudent economic policies of the present government, the Debt to GDP ratio is projected to decline over the next few years. However, considering the higher fiscal deficit and low GDP growth rate, it seems difficult for the government to attain diminution in the Debt to GDP ratio.

Going by the statement, the total public debt recorded at Rs 36.4 trillion till the end of June 2020, recording an increase of Rs 3.69 trillion during FY20. The component-wise break-up of this revealed that total domestic debt stood at Rs 23.283 trillion and external stood at Rs 13.116 trillion, while by the end of Sep 2020, the former reached Rs 23.7 trillion, whereas later climbed to Rs 13.247 trillion.

The increase of Rs 3.69 trillion in total public debt in FY20 compared to FY19, was largely due to increase in the financing of the federal primary deficit by Rs 982 billion, interest on the debt by 2.62 trillion, and exchange rate devaluation effect by Rs 399 billion.

As highlighted above, the Federal primary deficit was recorded at Rs 982 billion in FY20. According to the debt statement, during July-March FY20 government, after a gap of many years, achieved an overall primary surplus of Rs 194 billion on the back of strong tax and non-tax revenues and aggressive expenditure management. However, after the onset of the pandemic, the government could not maintain the primary surplus for the entire year as pressures emerged simultaneously both on revenue and expenditure sides. Nevertheless, the government managed to keep the primary deficit lower than the last fiscal year as the federal primary deficit reduced by Rs 562 billion from Rs 1.544 trillion in FY19, attributed to earlier gains which created enough fiscal space to deal with Covid-19 shock.

Another major reason for the accumulation of public debt was interest payments on existing debt. The government claimed that interest payments on debt obtained by the previous regimes constituted a major share in total interest payments.

Meanwhile, it is important to note that public debt increased from 86% of GDP in FY19 to 87.24% in FY20 which is far above the threshold of 60% set under the Fiscal Responsibility and Debt Limitation Act ( FRDL) 2005. While the government is optimistic that necessary steps for ensuring fiscal discipline that the government is taking along with structural reforms will place public debt on a firm downward trajectory, whilst government’s effort to improve maturity structure will enhance public debt sustainability.

As the policy document stated government remained within the stated benchmarks of risk indicators and achieved all targets set for the fiscal year 2019-20 with respect to debt risk indicators. No borrowings were made from the State Bank of Pakistan (SBP) since July 2019 and Rs569 billion of the central bank debt was retired by the federal government. Moreover, more than 90% of borrowings were made through longer-term debt instruments, it highlighted.

The outstanding guarantees as per the statement stood at Rs 2,343 billion till the end of Sept’20 against Rs 2, 344 billion on Jun’20. While at the end of FY19 they were around Rs 1,969 billion. The volume of new guarantees issued during a financial year is also limited under the Fiscal Responsibility and Debt Limitation Act at 2% of GDP. During the financial year 2019-20, the government issued new guarantees including rollovers amounting to Rs 342 billion or 0.8% of GDP.

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