When the present government started its term in June 2013, it inherited challenges like large fiscal deficit, rising debt burden, unfavourable balance of payments, low foreign exchange reserves, poor growth in tax revenues with shrinking tax-base, swelling current expenditures, a gigantic circular debt that was unraveling the energy sector, flight of capital, weakening exchange rate and perilously declining investors confidence. On the external front, the major development partners had considerably scaled down their support due to waning economic fundamentals and apparent inability of the country to service its external obligations in the near future. One of the main challenges was absence of external financing which was causing turbulence in the domestic exchange markets and tilting the composition of public debt towards domestic debt and that too into shorter maturities creating vulnerabilities and entailing high rollover and refinancing risks. State Bank of Pakistan (SBP) forex reserves, which stood at $6 billion in June 2013 fell to $2.8 in February 2014. It was a highly precarious situation for the external account.
In early 2013, it was predicted that the country might default on its sovereign obligations, if necessary steps to avert the situation were not taken. These predictions were made by the financial experts, who had analyzed the macroeconomic situation prevalent at that time and reached the conclusion that the country would not have sufficient external resources to meet its obligations of external debt falling due beyond February/June 2014. There was a dire need for stemming the depleting reserves and stabilizing a fast depreciating currency, which touched Rs.110.25 against US Dollar on 29 November, 2013, was fuelling inflation and raising the cost of debt servicing. The importance of lengthening the maturity profile of domestic debt became inevitable while maintaining interest rate stability and regaining growth momentum was also required to counter the impact of indebtedness.
On assuming office, the present government took necessary steps for avoiding default, ensuring fiscal discipline and consolidation, stabilizing a collapsing economy and accelerating growth. Accordingly, the government started revamping the economy through structural reforms and stabilization measures such as reduction in un-targeted subsidies, broadening the tax base, restructuring the Public Sector Enterprises (PSEs), building foreign exchange reserves and reducing the fiscal deficit, while ensuring that social safety net and development spending are not only protected but enhanced considerably.
The fiscal consolidation paved the way for a reduction in the Debt to GDP ratio, which fell from 64 percent in FY2012-13 to 63.5% at the end of FY2014-15. In the next three fiscal years, our target is to bring down the Debt to GDP ratio to 60% or less.
Despite these achievements, many detractors of the Government are ceaselessly creating doubts about the debt situation of the country. There is, therefore, a need to set the record straight.
Pakistans total public debt as of 30-06-1999 was Rs.2,946 billion of which domestic public debt was Rs.1,389 billion and external debt was Rs.1,557 billion. Total public debt as of 31-03-2008 was Rs.5,800 billion which included domestic public debt of Rs.3,020 billion and external debt of Rs.2,780 billion. Public debt further increased to Rs.14,318 by the end of FY2012-13, thereby the previous government contracted net debt of Rs.8,518 billion during its term 2008-13.
Pakistan runs a persistent fiscal deficit. For FY2012-13, the countrys fiscal deficit was projected at 8.8% of GDP. It was due to a major effort during the last month of the FY2012-13 that we were able to contain it at 8.2%. Such a high level of fiscal deficit is unsustainable as it adversely affects economic growth and necessitates larger amount of borrowing to meet the fiscal gap.
The present government started its first fiscal year in 2013 with inherited total public debt of Rs.14,318.4 billion comprising of external public debt of $48.13 billion (Rs.4,796.5 billion) and domestic public debt of Rs.9,521.9 billion. During the period from July 2013 to December 2015, the total public debt has grown to Rs.18,467.3 billion out of which the external public debt is $53.36 billion (Rs.5,589.2 billion) while domestic public debt is Rs.12,878.1 billion. Thus, there is a net increase of Rs.4,148.9 billion in total public debt, inclusive of $5.23 billion of external debt.
The reason our government was able to achieve a lower level of borrowing was that we kept the fiscal deficit under control by enforcing fiscal discipline. In this context, efforts have been made to achieve lower targets of fiscal deficits in the first 3 fiscal years of our government.
Present government has repaid over $10 billion of external debt till end December 2015, which mainly related to the borrowings of the previous governments. Despite this heavy repayment, the foreign exchange reserves of the country have risen to more than $20 billion, of which SBP reserves were $15.8 billion at end Dec 2015, which is equal to nearly four months of import-cover as compared to less than around 3 weeks of import-cover in February 2014 when the SBP reserves stood at $2.8 billion.
The critical consideration in debt management is the sustainability analyses for which various indicators have been designed. Major debt sustainability indicators have improved in the first two fiscal years, a fact that is acknowledged by global stakeholders. Furthermore, large portion of the forex loans were contracted at extremely low rates and attractive terms. This is evident from the average cost of the total external debt obtained by present government till December 2015 which comes to around 3.3 percent. After including the grants mobilized by the current government, the average cost of borrowing further reduces to 3.03%, which is significantly lower than the domestic financing cost of about 10 percent even after one builds a margin of capital loss due to exchange rate depreciation. Thus cost of the external debt contracted by current government is not only economical but is also dominated by long term funding. To establish the fact that this government has slowed down the pace of debt accumulation, the declining trajectory of Debt to GDP ratio is a sufficient proof.
It is worthwhile to mention here that some quarters are quoting an incorrect number of external public debt. There is a need to understand the difference between External Public Debt and Total External Debt and Liabilities of the country. External Public Debt stood at $53.4 billion, as at End-December 2015 while at the same time the total external debt and liabilities of the country were $68.5 billion. Total external debt and liabilities include debt of other sectors which by definition are not considered as public external debt since the government is not liable to pay these obligations. It includes debt of private sector and banks etc.
A misconception commonly spread is that the CPEC will result in increase in public external debt to $90 billion by 2018. This is neither based on facts nor on a proper understanding of debt dynamics. First, a wrong base number of $66 billion is being used to arrive at the $90 billion number. Secondly, out of the total CPEC package of $46 billion, a major share of $35 billion is in the private sector, mostly in power generation in IPP mode, not adding to the external public debt.
Those making such astounding claims seem to lose sight of the fact that while making debt projections, the debt due for repayment during the corresponding period is to be taken into account as well. While new debt is contracted, previously accumulated liabilities are being discharged at the same time.
Another baseless and misleading news was recently run by Bloomberg, which otherwise is a very credible new agency, that Pakistans external debt of nearly $50 billion was maturing during 2016. This wasoutlandish speculation completely bereft of any truth. Our total external debt is close to this amount and is due to be retired in the next 40 years. Ministry of Finance issued two detailed rejoinders, which were suitably addressed by the Bloomberg.
By the grace of Almighty Allah, Pakistans economy is showing visible signs of improvement. Having successfully averted the predicted default of June 2014 and having achieved macro-economic stability, our government is now making efforts to put the economy on a high growth trajectory with a target of 7% by 2018 that would enable significant reduction in poverty and creation of jobs for our youth. The government under the leadership of Prime Minister Muhammad Nawaz Sharif is determined to consolidate the economic gains achieved so far and to ensure that these translate into increased economic opportunities for the common man.