The Ministry of Finance has stated that the rise in the public debt over the past three years is due to the implementation of “difficult and unavoidable policy choices”.
Pakistan’s total domestic and foreign debt grew by Rs. 17.949 trillion from July 2018 to June 2021, according to data released by the State Bank of Pakistan (SBP).
The ministry issued a clarification to counter media reports that it said had “ignored the underlying reasons” behind the rise in the debt.
One of the reasons for the rise in the debt that it cited was the previous government’s tendency for short-term domestic borrowing without adequate cash buffers. This had resulted in a short-term profile of domestic debt at the end of FY 2018.
This short-term profile led to a high interest cost on the debt because the interest rates had to be increased to mitigate the rising inflationary pressures. The government has paid Rs. 7.500 trillion in interest servicing, which explains half of the increase in the public debt.
The second reason was the transition to a market-based exchange rate regime. This had caused a sharp depreciation in the exchange rate that had added around Rs. 2.900 trillion to the total public debt and contributed to 20 percent of the increase in the debt.
The ministry said that “it is important to highlight here that this increase was not due to borrowing but due to re-valuation of external debt in terms of rupees after currency devaluation”.
It also highlighted that the economic slowdown due to the pandemic has caused a higher-than-expected primary deficit. The government had borrowed Rs. 3.5 trillion to finance the primary deficit, contributing 23 percent to the total increase in the debt.
Lastly, seven percent of the total increase in the debt was due to the government increasing cash balances to meet emergency requirements.
The government did not borrow from the State Bank of Pakistan, and this had led to a “one-off” increase in debt, the ministry explained.
“A better way to measure the level of debt is through Debt-to-GDP ratio instead of looking at the absolute values of debt,” the ministry said.
Pakistan’s debt-to-GDP ratio rose by 13 percentage points during the pandemic, which is its smallest increase of the measure to date. In contrast, the global debt-to-GDP ratio increased by 13 percentage points.
The ministry concluded with the statement that “as most of the major adjustments to fiscal and monetary policies have been made, the debt burden is projected to decline firmly over the next few years”.
