World Economic outlook - Pakistan Public debt-to-GDP ratio forecast 2014 : The Debt Policy Statement 2011-12 issued by the Ministry of Finance has warned that the public debt-to-gross domestic product (GDP) ratio will increase to 65.2 percent by fiscal year 2014, breaching the maximum limit of 60 percent set by the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005.
Failure to arrest the widening gap between foreign exchange inflows and outflows will severely hamper the government’s room to manoeuvre in case of future external shocks and may possibly lead to a balance of payment crisis and explosive debt path, the statement further added.
Debt Policy Statement issued by the Debt Policy Coordination Office, Ministry of Finance stated that a combined shock to these variables will largely erode the fiscal stability and debt dynamics of the country, and will place the economy on an increasing debt path. More specifically, under such circumstances, not only will the targeted achievement of primary balance be jeopardised, but the falling trend in the debt burden will be reversed. The public debt-to-GDP ratio will increase to 65.2 percent by FY14, breaching the limit imposed by FRDL Act 2005.
The public debt as percentage of GDP has been measured as of FY 2007 at 60.1 percent of the GDP, FY 2008 59 percent of the GDP, FY 2009 60 percent of GDP, FY 2010 60.1 percent of GDP and FY2011 59.3 percent of the GDP.
The domestic debt stood at Rs 6.223 billion at the end of the first quarter of 2011-12, representing an increase of Rs 208 billion during the first three months of the current fiscal year. This increase stems from a healthy issuance of market debt namely Treasury bills Rs 290.6 billion and Pakistan Investment Bonds Rs 52.5 billion. Notably, this quarter witnessed a massive retirement of Rs 104 billion in the stock of central bank borrowing.
The country’s External Debt and Liabilities stock was recorded at $60.1 billion as of June 30, 2011. During 2010-11, $4.5 billion was added to the stock resulting in a growth of 8.1 percent. Bulk of this increase was contributed by depreciation of the dollar against other major international currencies. The outstanding stock of private non-guaranteed debt increased by only $315 million at the end the fiscal year 2010-11 at $3.483 million.
In its concluding remarks, Debt Policy Statement stated that increased pressure on government’s limited financial resources from higher security related expenditures and unsustainable power and food subsidies have resulted in higher fiscal deficits in the recent path, situation is further compounded by weak taxation machinery. Recent levels of high public debt and large external debt are results of persistent fiscal and current account deficits, non-optimal utilisation of financial resources, diminishing debt carrying capacity and rising cost of borrowing.
Public debt-to-GDP ratio declined by a 0.8 percentage points to stand at 59.3 percent during FY11, below the ceiling of 60 percent envisaged in the FRDL Act 2005. Fiscal control and a limit on borrowing from the State Bank facilitated this reduction. However, public debt-to-GDP may be understated as this ratio does not include any estimates of contingent liabilities, which might materialise in future. Unfortunately, the government has not installed any system to quantify and manage the fiscal impact of these contingent liabilities, rather these liabilities are created essentially on an ad hoc basis and without regard to fiscal consequences.
Soundness of Pakistan’s debt position, as given by various sustainability ratios, while deteriorating slightly in the previous fiscal year, remains higher than the internationally accepted thresholds. Total public debt levels around 3.5 times and debt servicing below 30 percent of government revenue are generally believed to be within the bounds of sustainability. Total public debt in terms of revenues has increased to 4.7 times during 2010-11, as opposed to 4.3 times in the previous fiscal year whereas the debt serving to revenue has declined to 37.7 percent in 2010-11 from 40.4 percent in 2009-10. Regardless, the widening gap between the real growth of revenues and real growth of total public debt needs to be aggressively addressed to reduce the debt burden and improve the debt carrying capacity of the country to finance the growth and development needs.
Pakistan’s external debt and debt servicing in terms of foreign exchange earnings stood at 1.3 times and 11.4 percent during 2010-11 as compared to 1.5 times and 16.5 percent, respectively in 2009-10, within the acceptable threshold of two times and debt servicing below 20 percent of foreign exchange earnings. However, repayment of the International Monetary Fund (IMF) debt starting from 2HFY12 will put pressure on external debt servicing in coming years, therefore it is imperative for the government to take measures for attracting both debt and non-debt foreign currency flows. In the current global economic scenario it will be an uphill task for the government to manage external account solvency.
Divergent trends between growth in foreign exchange earnings and government revenues on one hand, and foreign exchange payments and expenditure on the other hand, point towards underlying structural issues, which need to be addressed. Export receipts and other foreign currency non-debt creating flows need to be increased above and beyond the growth of foreign exchange payments and growth of external debt and liabilities. By doing so, the government will be able to restrict the non-interest current account deficit, and ensure the sustainability of present levels of external debt.
The difference between revenues and expenditure and their growth rate poses similar problems for public debt management. To limit the growth of public debt burden and to avoid future debt traps, it is essential that significant real growth in revenues is achieved while undertaking a simultaneous rationalisation of expenditure. It must be noted however that rationalisation of expenditure should not adversely affect outlays under the Public Sector Development Programme as they are essential in ensuring future economic growth and social welfare. Debt reduction to sustainable levels cannot be achieved without persistent economic growth. The slowdown in growth is a major consequence of rising debt burden and simultaneously adversely impacts the debt servicing capacity of the economy. Therefore it is important for the government to adopt an integrated approach for economic revival and debt reduction strategy, which will require some difficult trade-offs in the short-term, thus implementing structural reforms that boost potential growth, is a key to ensure debt sustainability.
Given the impact international exchange rate movements (dollar vis-à-vis other international currencies) have historically had on external debt, and the significant transnational losses suffered in the FY 2011, the government should take measures to mitigate the market risk factor of external borrowing by planning to implement a broad-based currency and interest rate hedging strategy and ensuring exchange rate stability. source http://www.dailytimes.com.pk/default.asp?page=2012\02\02\story_2-2-2012_pg5_1
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