Globally, fast rising trend of both external and domestic debt, emerging in 2008 and onwards due to economic recession has engulfed the entire financial world in a whirlpool of fiscal deficit both in developed and developing economies. Some of the high-income developing countries had taken radical measures to recapture their lost ground and luckily came out of quandary. However, the onslaught of Covid-19 factor has drastically damaged their economies and put them in a negative growth rate situation.
The problem has, however, aggravated in case of low-income developing countries. Pakistan, in particular, where slow penetrations of aftereffects of global recession — which apart from causing fast depletion in economic growth rate resulted in growing fiscal deficit — have now dragged the country into a worse situation due to invasion of Covid-19. As such, the country continues to experience inflating domestic as well as external debt, currency debasement and plans to table repeated requests for restructuring of debt instead of going for default, which has been a practiced phenomenon among Latin American countries and even some Middle Eastern countries in the past. These countries have achieved a significant reduction in their external debts via restructuring and default.
Pakistan’s economy is already in the grip of substantial debt and in the face of the recent past’s devastating floods and now Covid situation, warrants further heavy internal as well as external borrowings, leading to further worsening debt-GDP ratio as external debt and liabilities have reached US$ 87.9 billion and after adding domestic debt of Rs. 22,283 billion by end of June 2020, total debt stands at 101.3 percent of GDP.
On the other hand, in the present scenario during fiscal year of 2019-20, Rs. 2.4 trillion going for domestic debt servicing represents 50.3 percent of tax revenue, which highlights our falling quickly into the debt trap. Ailing public sector entities alone consume a subsidy exceeding Rs. 350 billion, which is now planned to be reduced to Rs. 180 billion during the current fiscal year. Consequently, fiscal and monetary discipline cannot be achieved, and the country is faced with a galloping inflation despite tight monetary policy (although now eased up to some extent). Thus, the country is trapped in a vicious cycle of rising allocations for debt servicing, fiscal deficit and further borrowings every year.
Pakistan already owes US$7.7 billion to International Monetary Fund (IMF) apart from its liability to other funding sources, like Asian Development Bank (ADB) and various multilateral funding agencies and Paris Club etc. Unfortunately, due to delayed payment a sizable percentage of debt is deducted at source on account of penalties and interest etc. However, some of these funding agencies are seriously thinking of providing debt relief to developing economies, including Pakistan, to overcome economic losses caused by onslaught of Covid-19. Particularly, Paris Club countries have suspended $1.8 billion payable by these countries in the form of principal amount and interest. These amounts would be restructured in remaining payment schedule. IMF also has plans to provide some repayment relief to Pakistan regarding its total debt outstanding. Paris Club countries must voluntarily come forward to write off all loans disbursed to Pakistan in addition to relief already announced by Paris Club countries regarding repayment of existing loans. Since Pakistan is an ally to NATO, which all Paris Club countries are members of and are busy in gaining control over Afghan Taliban through reconciliation strategy, they, in view of Pakistan’s major role in facilitating their reconciliatory efforts to arrest the activities of Taliban in Afghanistan, must come forward to the rescue of Pakistan’s government to get rid of mounting external debt.
Increasing economic and political vulnerability has forced present government to acquire more loans not only for rectifying the prevailing situation, but also to facilitate inherited quantum of external debt. Unfortunately, despite Pakistan’s effective role in curbing terrorism all over the globe, the country continues to be in the grey list of FATF and funding agencies continue to attach more and more strings to fresh loan packages. IMF insists on bringing major tax reforms to enhance tax-GDP ratio during the current fiscal year and also on removing all subsidies from utility services. Further pressure from their side to increase prices of utilities, particularly electricity and gas, will result in slow down of economic activity, increase in unemployment and cost of living, thus nullifying the results of tax reforms planned to be undertaken.
In order to manage the external debt, it is essential that fiscal discipline be strictly observed. For that, government borrowings from banking sector needs to be drastically cut down by controlling non-developmental expenditures, for which size of all cabinets and all administrative expenses, including remunerations and perks of legislators, should be reduced by 50 percent and travel expenses at all levels be strictly monitored to prevent waste of country’s resources.
Apart from asking for loan remissions/write offs, the government needs to demand greater economic access to NATO countries’ markets, particularly USA. To arrest uncontrolled growth in domestic debt, the government has once again started to rely only on long- and medium-term government securities like Pakistan Investment Bonds and National Saving Schemes. The debt burden and its cost are likely to reduce substantially after the government’s very recent success in issuing long term bonds at interest rate well below policy rate.