Thwarting Pakistan Economic Outlook
Ahmed, Nadeem, Economic Review
With the growing macroeconomic imbalances, the issue of debt sustainability in Pakistan has become a vital aspect of government stabilization policy. Historically, Pakistan economy ably absorbed domestic or international economic shocks and maintained acceptable level of real growth rate. This exceptional trait of the economy is gradually diminishing with the integration of world economy. The internal economic structural vulnerabilities such as high budget deficit, low tax-to-GDP ratio, inadequate national saving, higher input cost, etc. were exposed with a relatively mild impact of the recent global economic crisis. Some of the consequence been high inflation, unemployment, increased budget deficit, decline in real GDP and per capita income growth.
There is a direct relationship between budget deficit and growth in public debt. In Pakistan, total stock of public debt will reach at unsustainable level if the government did not respond prudently. In future, larger and persistent budget deficit, coupled with sluggish economic growth, may induce chronic public debt crisis in Pakistan. The economy will be in a debt trap when the sources of financing of budget deficit further increases the future debt liabilities. Budget deficit may be financed by deficit financing, bank borrowing, and external sources.
Domestic financing of budget deficit (deficit financing and bank borrowing) will induce inflation and crowding out of private investment respectively that could cause major macro-economic imbalance in the economy.
External financing, on the other hand, would help stabilize the economic imperatives at the cost of enhanced future debt burden liabilities.
Pakistan, over the years has experienced a relatively high budget deficit. In 1997-98 it stood at 7.7 percent of GDP, came down to 2,3 percent in 2003-04 while it again increased to 7.4 percent in 2007-08. With international economic recession and low level of economic growth in coming years, the indicators signify that public debt in Pakistan would become unsustainable in next five years.
Public debt composition in Pakistan has two broad categories, i.e. domestic debt and external debt. Domestic debt includes permanent debt, floating debt and unfunded debt, whereas the external debt consists of medium and long-term, short-term, and private non-guaranteed debt, loans from the IMF and foreign exchange liabilities. Domestic debt as percentage of GDP was only 17 percent in 1980-81 that increased to 37 percent in 1989-90. Due to large budget deficit in 1990s. the domestic debt to GDP ratio reached to 43 percent in 1999-2000. The cruciating affect of debt issue, perhaps, provided grounds to the then military government to form a debt sustainability strategy to take advantage of high growth rate in the GDP and per capita income. Consequentially, Pakistan economy did experience a decrease in the domestic debt to 31 percent of the GDP, whereas, the foreign debt, which was 49 percent of the GDP in 1989-90, drastically came down to 28.5 percent of the GDP. The government then also managed to lower the total public debt-to-GDP ratio to 60 percent from alarming 86 percent in 1989-90.
Multiple factors associated with the debt sustainability that are:
(a) if the country confronting macroeconomic imbalances, such as low economic growth, shortfall in total tax collection, increase in government expenditures, high interest rate on debt, decline in exports and remittances and high budget deficit than debt-to-GDP ratio would increase all require more finances for debt repayment,
(b) Whereas reliance on external sources to finance its budget deficit would further increase the stock of external debt and subsequently increase pressure on the country's foreign exchange reserves. In the absence of foreign exchange earnings, depletion of foreign exchange reserves and depreciation of rupee value can be prevented by rationalizing imports and providing efficient banking services to expatriates for foreign remittances,
(c) Cost of debt repayment would increase with the increase in real interest rate. …