Surge in Central Government Debt: A Growing Concern for Pakistan

The central government debt of Pakistan surged by Rs8.07 trillion, or 13%, during the previous fiscal year, bringing the total debt to a staggering Rs68.9 trillion by the end of June 2024, according to data released by the State Bank of Pakistan (SBP) on Thursday. The significant rise in debt highlights the growing financial challenges faced by the government and citizens alike.

Monthly Increase and Economic Implications

The debt stock saw a sharp increase of 1.7% in just one month, rising from Rs67.73 trillion at the end of May 2024. This continuous rise in debt has exacerbated financial pressures on the government, making it increasingly difficult to service existing debt and finance development projects. The public, in turn, faces the burden of new taxes as the government struggles to manage its finances.

Despite these challenges, government spending has not decreased, which could have provided some relief to the public and allowed for more development expenditures. Instead, budget allocations for the Public Sector Development Programme (PSDP) have been repeatedly slashed to accommodate rising spending, contributing to economic contraction in FY23 and a modest growth rate of 2.4% in FY24.

Rising Debt and Debt Servicing

A significant portion of government spending has been financed through additional borrowing. The government paid Rs8.3 trillion in debt servicing during FY24 alone. For the current fiscal year, the government has earmarked Rs9.78 trillion for debt servicing, which accounts for more than half of the total budget outlay of Rs18.9 trillion.

Data reveals that the federal government’s domestic debt increased substantially by Rs8.35 trillion, rising from Rs38.81 trillion in June 2023 to Rs47.16 trillion by the end of June 2024. Pakistan Investment Bonds (PIBs) played a major role in this increase, with the domestic debt rising by Rs6 trillion to reach Rs28 trillion over the year. Market Treasury Bills also contributed to the rise in total debt, increasing to Rs10.25 trillion by June 2024 from Rs9.33 trillion in June 2023, partly due to attracting about $444 million in foreign investment during FY24.

Foreign Debt Servicing and Rollover

While domestic debt has surged, the country’s foreign debt servicing decreased in FY24 compared to the previous year, primarily due to the rollover of repayments. According to SBP data, Pakistan paid $16.94 billion in debt servicing during FY24, down from $20.82 billion in FY23 — a reduction of $3.89 billion. Of the total debt servicing payments made in FY24, $5.46 billion was for interest, while $11.48 billion covered the principal amount. The rollover of debts resulted in lower interest and principal payments compared to FY23, with the payment of the principal falling by $4.92 billion and interest payments decreasing by $1.03 billion year-over-year.

Improvement in Debt Indicators

Amidst these challenges, there has been some positive news on the debt front. A report from Topline Securities suggests that Pakistan’s debt indicators have significantly improved in the fiscal year 2024. Both the overall debt-to-GDP ratio and the external debt-to-GDP ratio reached six-year lows, marking a positive trend for the country’s economic health.

The country’s debt-to-GDP ratio fell to 70% in FY24, attributed to the fact that nominal GDP has grown at a faster pace than debt, driven largely by higher inflation rates. Similarly, the external debt-to-GDP ratio declined to 26% in FY24 from 32% in FY23, owing to a relatively smaller increase in foreign currency borrowings compared to the rise in local currency debt.

Further improvements were seen in the ratio of external debt servicing to total exports, which fell sharply to 35% in FY24 from 51% in the previous fiscal year. This ratio indicates how much of a country’s export revenue is used to service its debt, and a lower ratio suggests less vulnerability to an unexpected fall in export proceeds.

Conclusion

The surge in Pakistan’s central government debt presents a significant challenge for the country’s economic stability. While the government grapples with rising debt and the need for increased borrowing, there have been some improvements in debt indicators, offering a glimmer of hope for future economic resilience. However, the path forward will require careful fiscal management and continued efforts to stabilize the economy.