S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
Mar 14 - 20, 2011
Sovereign debt has traditionally received much attention as a crucial component of a country's macroeconomic and financial policy framework. The conventional view is that debt can stimulate aggregate demand and output in the short run, but crowds out capital and reduces output in the long-run.
High public debt can adversely affect capital accumulation and growth via higher long-term interest rates, higher future taxation, inflation, and greater uncertainty about prospects and policies. In more extreme cases of a debt crisis, by triggering a banking or currency crisis, these effects can be magnified. High debt is also likely to constrain the scope for countercyclical fiscal policies, which may result in higher volatility and further lower growth. Intuitively, high debt may not only increase uncertainty about economic perspectives and policies but also raise vulnerability to crises, which may be accompanied by higher macroeconomic volatility.
PAKISTAN'S DEBT AND LIABILITIES (AS % OF GDP)
ITEMS 9-SEP 10-SEP Total Debt and Liabilities 63.4 73.3 Total Public Debt 56.7 66 Total External Debt & Liabilities 31.3 34.4 PSEs Debt & Liabilities 5.3 5.6 Government Domestic Debt 27.4 33.8
Public debt has also increased in some emerging economies (e.g., in Central and Eastern Europe) during the recession, although the bulk of these economies have not been hit as hard as advanced economies, reflecting their relatively healthier fiscal positions before the crisis. Nonetheless, emerging economies tend to have a lower debt tolerance, owing to narrower and more volatile revenue bases, and are exposed to spillover from solvency risks in advanced sovereigns.
In the country during FY2009-10, external debt servicing summed to US$7.364 billion that is 16.4 per cent higher than the previous year. A segregation of this aggregate number shows a payment of US$4.632 billion in respect of maturing EDL stock while interest payments were US$1.009 billion. US$1.732 billion was rolled-over. Among the principal repayments, US$897 of multilateral debt and US$600 million of international Sukuk bond accounted for most of the share whilst short-term scheduled banks' borrowing observed heavy repayments approximating to US$1.181 billion. Similarly, hefty interest payments worth of US$877 million on foreign currency public debt contributed to the bottom line.
During the same period 2009-10, non-interest current account deficit was 1.4 per cent of nominal GDP, much less than the 4.5 per cent recorded in FY2009. Similarly, the foreign exchange earnings of the country were up by 7.9 per cent whereas the non-interest foreign currency payments decreased by a slower pace than that of 2008-09. These positive developments on the balance of payments front, besides other factors, culminated into a restrained growth of 6.3 per cent in the country's external debt and liabilities stock as opposed to a high average growth of 13.9 per cent over the last two years.
In FY2010-11, the central bank deposits were mostly rolled over. During July-Sep 2010, the servicing on external debt was recorded at US$2.169 billion. Out of the grand total, principal repayments were US$1.436 billion and interest payments were US$233 million. The roll-overs amounted to US$500 million in the first quarter of 2010-11. Notwithstanding, with the IMF's SBA repayments set to initiate in the second half of FY 2011-12, the servicing will increase to much higher levels.
Pakistan has been facing acute problem of inflation for last four years, spent most of the revenue generated by economy on debt servicing. This outflow of resources creates serious shortage of revenue and thus causes widening of fiscal deficit going beyond control and beyond the target given by the IMF.
More recently, the massive debt servicing which included principal amount was clearly a huge burden on economy, which could hardly generate targeted revenue of Rs1.6 trillion in 2010-11. The country had to pay Rs660 billion as interest on debt while it paid Rs391.8 billion as principal amount. Out of Rs660 billion, the government had to pay Rs577.7 billion as interest payment for domestic debt while external debt service amounted to Rs83 billion. The interest payment of liabilities amounted to Rs17.6 billion which shows that most of revenue goes to debt-servicing. In the first quarter of the current fiscal year (September-2010), total debt and liabilities services increased by 27 per cent to Rs305 billion. Total debt and liabilities servicing was 7.3 per cent of the GDP. It may be shocking for country's economic managers and economy watchers that total debt and liabilities of the country have gone up to 73.3 per cent of the GDP till September 2010 (provisional figures). The external debt and liabilities constituted 34.4 per cent of the GDP while government's domestic debt was 33.8 per cent of the GDP. IMF is the largest lender to Pakistan as it has been providing $11.3 billion under the standby agreement.
The level of debt depends on the debt servicing capacity of the economy i.e. export earnings and revenue generation. The debt burden can be expressed in terms of stock ratio i.e. debt to GDP, external debt (EDL) to GDP or flow ratios i.e. debt to revenue, external debt to foreign exchange earnings (FEE). Pakistan's external debt and debt servicing in terms of foreign exchange earnings stood at 1.46 times and 14.8 per cent during 2009-10 compared to 1.48 times and 13.4 per cent respectively in 2008-09. The government is borrowing from State bank and commercial banks at a record pace which would accumulate stocks of debt, resulting in higher debt servicing in future.