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Review of domestic and external debt of Pakistan

International studies identified that economic growth and development is a main goal of most developing states; hence resources are mobilized from various sources counting external borrowing for investment into feasible projects for growth acceleration in any state. It is also identified that sustainable economic growth is a predominant concern for all states, particularly developing economies that regularly face burgeoning fiscal deficits mostly driven through higher levels of debt service, mainly foreign debt servicing and widening current account deficits.

res2pic1In the developing state like Pakistan, current statistics showed that general government debt (counting guarantees and IMF borrowing) fell to 84.7 percent of Gross Domestic Product (GDP), from 88 percent. A present released report on Pakistan by IMF said this fall in debts was mostly driven through the government’s smart performance in reducing expenditures, registering primary budget surplus and growing tax and non-tax revenues during the first five months of this fiscal year. Statistics in the report also showed that in the first quarter of FY2019-20, budget execution by the incumbent government enhanced significantly, recording a primary surplus of 0.6 percent of GDP and an overall deficit of 0.6 percent about 1 percent of GDP better than programmed. It is said that the over performance was driven through stronger than predicted non-tax revenues, accompanied by double-digit growth in tax revenue net of refunds. At the same time, because of import compression, customs receipts and other external sector-related taxes have suffered, the report identified, adding that spending, counting through the provinces, has remained prudent.

However, a present released report on Pakistan by IMF during FY2019, the budget recorded a primary deficit of 3.5 percent of GDP and an overall deficit of 8.9 percent, against its target of 1.8 percent and 7 percent, respectively. A revenue collection at the federal level came in at 2 percent of GDP, lower than predicted, while total expenditures and provincial fiscal balances were in line with projections. Around three-fourth of the revenue shortfall were because of one-off factors, which are not predicted to carry over into FY20. In particular, present IMF report also recorded that delays in renewing telecom licenses, a temporary delay in the sale of state assets, and weaker than predicted amnesty proceeds contributed around 1 percent of GDP, while a shortfall in the transfer of State Bank of Pakistan (SBP) profits to the budget, stemming from losses related to the exchange rate depreciation in late FY19 added a more 0.5 percent of GDP. As a result of the fiscal slippages and the exchange rate depreciation, but also the Government of Pakistan’s decision to raise cash deposits significantly to offer a financing cushion against potentially unfavourable market situations, government debt (including guarantees and IMF borrowing) increased to 88 percent of GDP.

With respect to government’s performance in revenue collection, the IMF’s report recorded that with 34 percent nominal growth, as against to 1QFY19, total revenue over-performed the programmed projections by 0.2 percent of GDP. On account of tax policy measures implemented at the starting of FY20, the local component of tax revenue collected through the FBR, registered robust growth of 25 percent.


Statistics in the report also revealed that growth was mainly strong in sales and direct taxes, where most measures were targeted. At the same time, taxes collected at the import stage were impacted through substantial import compression, with a fall in all revenue categories except of sales tax. Given that greater than 40 percent of total tax revenue in the country is collected at the import stage, this shortfall had a notable impact on overall tax revenue performance 0.2 percent of GDP lower than programmed. One-off tax revenue inflows (approximately PKR 30 billion) also contributed to the overall result and are related to tax advances and tax amnesty receipts that were not collected at the end of FY19 but were realized in the first quarter of FY2019-20 instead. Tax revenues collected at provincial level were also strong, growing by 18 percent. Non-tax revenues almost tripled in first quarter.

On the other hand international economists recorded that the external debt constitutes a greater share of the public debt structure in developing states. Reliance on external borrowing is not only rationalized on the grounds that excessive domestic borrowing can lead to financial unrest and crowd out the private sector but also, as argued by the experts, developing states in their early stages of development need to borrow externally due to insufficient domestic capital for investment.

It is also recorded that over the years the government of Pakistan has failed to collect sufficient revenues to finance its budget. Consequently, it has been facing the challenge of twin deficits and resultantly to finance their developmental activities. Different sources recorded that the accumulation of external debt is common phenomenon of the developing states and it has become a common feature of the fiscal sectors of most of the economies. A country with lower saving rate needs to borrow further to finance the given rate of economic growth. So external debt is obtained to sustain the growth rate of the economy, which is otherwise not feasible with the given domestic resources.

Pakistan is one of the developing countries and faces serious debt challenges, according to World Bank Report published 2000-2001; the country is also among the Highly Indebted Countries (HICs); because Pakistan’s present and future debt condition is very grim.

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