Pakistan has the third highest debt service, that is, $15 billion or nearly 7 percent of the total for the Central Asia Regional Economic Cooperation (CAREC) region in 2020, says the Asian Development Bank (ADB) in its latest report “COVID-19 and Economic Recovery Potential in the CAREC Region”.
Among the CAREC countries, Pakistan is one of the members that experienced a current account deficit leading to International Monetary Fund (IMF) loan programs in the recent past. The debt-to-GDP ratio of Pakistan has increased from 67 percent to 86 percent between 2017 and 2019.
Pakistan’s debt-to-GDP ratio was the highest in the region at 86 percent in 2019 and further increased to 88 percent in 2020.
Addressing the financial constraints during COVID-19, CAREC countries have required fiscal resources at a larger scale. Governments provided fiscal packages to individuals and businesses to combat the economic shocks caused by COVID-19, it added.
The report noted that in the baseline scenario the Bank assumes: (i) the primary balance is close to zero and (ii) the historical real interest rate is 2.7 percent. Using these assumptions, the Bank project the debt-to-GDP ratio until 2030. The ratio decreases from 86 percent to 64 percent in 2030 if the government smoothly maintains the primary balance at a level close to zero.
A sustainable debt level will be achieved if GDP growth is higher than 4.5 percent annually and the real interest rate does not cross the historical real interest rate value.
The debt sustainability analysis for the CAREC region suggests that the overall risk of debt distress for Pakistan, Afghanistan, and Tajikistan is high, whereas the Kyrgyz Republic’s overall risk of debt distress is moderate, and that of Uzbekistan is low, according to the latest information.
Over the last decade, Pakistan, the People’s Republic of China (PRC), Tajikistan, and the Kyrgyz Republic had negative values for both average historical primary balance and overall fiscal balance. To manage the fiscal imbalance, governments massively stockpiled debt, which led to impacts on financial markets.
A high fiscal deficit affects resource allocation among the private and the public sectors. In Pakistan, the borrowing of the government from banks constitutes more than 90 percent of total loans, the report noted. This reduces the resources for the private sector and creates a barrier for private sector development.
CAREC economies are also spending on low-return public sector projects and unjustified subsidies such as those on food, fertilizers, and the petroleum sector. This requires a large share of state expenditures and gives rise to fiscal deficits.
Pakistan has accumulated more than $10 billion in new debt during the pandemic, the report noted.
The report noted that pandemic loans (February 2020–August 2021) were obtained by all CAREC countries, mainly by Pakistan (24 percent), Uzbekistan (23 percent), the People’s Republic of China (PRC) (20 percent), and Kazakhstan (13 percent). Pandemic loan volume was particularly high during April–August 2020. Nearly all of these loans (90 percent) were provided to governments.
The report noted that the direct health costs of COVID-19 are highest in Pakistan (around $2,019 million) and Kazakhstan (around $900 million).
In the long run, there is a need to invest more in the health sector to ensure the availability of required vaccination infrastructure at the micro-level.
The simulation results show that the People’s Republic of China and Pakistan gain the most from regional and global trade since the trade balance of the former increases by around $118 billion and the trade balance of the latter increases by around $4 billion.
Reducing tariffs in these countries will provide trade momentum in the region as the cost of doing business will decrease. These tariffs rates can be reduced by at least five percent for the CAREC countries during the pandemic and can be returned to their original levels if needed after gaining the required boost to trade.