COVID-19 and Pakistan’s rising debt

Tweet: As Pakistan experiences second COVID-19 wave, the pandemic will continue testing limits of rule-based fiscal policy. A more robust debt management and oversight system must be in place, writes Dr Vaqar Ahmed

The annual debt bulletin published by the ministry of finance shows how Pakistan’s debt as a ratio of national income has increased due to a decline in economic growth and an increase in the budget deficit. The ministry attributes both-- low growth and rising budget deficit entirely to the impact of Covid-19. This situation has also prompted economic managers to increase their reliance on borrowing from both local and international sources.  

We therefore note that borrowing needs are being met by higher levels of longer-term loans, sharia compliant sukuks, introducing a 15-year fixed rate Pakistan Investment Bond (PIB) and three and five year floating rate PIBs.  

The need for these debt instruments remained despite availing the G20 Debt Service Suspension Initiative (DSSI) which has reduced debt servicing costs by $2 billion between May and December 2020.  

Higher levels of borrowing by the government from local sources has implications for the private sector and domestic economy. Around 70 percent of the federal fiscal deficit was financed through domestic debt during fiscal year 2019-20. The total size of domestic debt increased by USD 11 billion during the period June 2019 to June 2020. 40 percent of total domestic debt was procured from local banks. This is bound to give rise to crowding out and reducing the appetite of commercial banks to finance the longer term needs of local businesses. 

Besides, the increased guarantees extended for public sector companies imply that the private sector becomes a lesser choice for the banks to lend. In FY20, the government issued guarantees worth PKR 342 billion or almost 1 percent of the national income for public sector entities.

Pakistan’s external debt was on the rise even before COVID-19. External debt which was at $78 billion in June 2020 increased by $4.5 billion during FY20. As the ability of multilateral partners to lend on concessional terms is coming to near exhaustion, Pakistan’s reliance on commercial sources at higher market rates remains at almost 18 percent of total external debt.

Dr. Vaqar Ahmed

While COVID-19 is being framed as the main cause of debt accumulation in the Ministry’s own analysis, the bulletin seems silent on gains which could have been made had the government made efforts to curtail the circular debt seen in energy, food and several other sectors.  

Pakistan’s external debt was on the rise even before COVID-19. External debt which was at $78 billion in June 2020 increased by $4.5 billion during FY20. As the ability of multilateral partners to lend on concessional terms is coming to near exhaustion, Pakistan’s reliance on commercial sources at higher market rates remains at almost 18 percent of total external debt.

As the world embraces a new wave of COVID-19, it is certain that the pandemic will continue to test the limits of rule-based fiscal policy. It is therefore imperative that a more robust debt management and oversight system should be in place.  

To start with, we are not seeing a more comprehensive discussion in the relevant parliamentary committees on how rising debt levels could threaten economic recovery in the longer term. This oversight role of the parliament can be strengthened through consultation and participation of civil society. None of the independent economic policy think tanks or academic institutions have been facilitated in the recent past to assist with the debt management framework. The finance ministry’s think tank which has already met three times since April 2020 has also not prioritized the issue.  

We are also seeing the Prime Minister chairing the huddles to discuss how to manage rising prices. While only stop-gap solutions have been proposed to bring down prices in the food sector, there is weak deliberation on how COVID-19 and anti-competitive market practices continue to impact fiscal deficit and core inflation in the longer term. 

This is also bound to hurt the cost of doing business and competitiveness of Pakistan’s agriculture and manufacturing sector – a key finding from a recent survey of exporting enterprises, being implemented by Sustainable Development Policy Institute in collaboration with UK’s Foreign, Commonwealth & Development Office.  

Meanwhile, Prime Minister Imran Khan is calling upon the G20 economies to extend the debt relief facility under DSSI for another year. 

But several development partners in Islamabad remain of the view that a country loses legitimacy to ask for more debt if it is not exhibiting the political will and capacity to plug losses accruing from varied sources, including the energy sector and state enterprises. 

The promised reform of public finance management, improving the tax to GDP ratio, and allowing autonomy to market regulators are also important pre-requisites by most lenders.  

As Pakistan embraces the next wave of COVID-19, it is important to understand that the government’s own capacity to help the poor by borrowing more from local or foreign sources will diminish. Traditional bilateral lenders may also not come forward given their own pressures at home. 

Only a stronger commitment to policy reforms outlined above could save future generations from the possibility of unprecedented debt which they will end up retiring.  

– Dr. Vaqar Ahmed is an economist and former civil servant.

He tweets @vaqarahmed