ISLAMABAD: Pakistan witnessed one of the smallest increase in its debt to GDP ratio during the Covid-19 pandemic period as it witnessed a minimal hike of 1.7 per cent compared to 13 percent rise in global debt, Finance Ministry said here Thursday.
Responding to media reports regarding increase in public debt during last three years, the statement said that a better way to measure level of debt was through debt-to-GDP ratio instead of looking at the absolute values of debt.
“Global debt-to-GDP ratio increased by 13 percentage points, whereas, Pakistan’s debt-to-GDP ratio witnessed minimal increase of 1.7 percentage points in 2019-20 (FY20),” it said, adding that the country’s debt-to-GDP ratio in fact reduced by 4 percentage points indicating lower debt burden at end June 2021 as compared with last fiscal year.
The ministry said that the increase in debt during last three years occurred mainly during fiscal year 2018-19 (FY19) due to implementing difficult and unavoidable policy choices.
Had the market-based exchange rate, a sustainable level of current account deficit (CAD), adequate cash buffers and long-term domestic borrowing profile been maintained, the debt burden would have been reduced further on the back of fiscal consolidation efforts supported by aggressive control on expenses and growth in tax and non-tax revenues, the statement said.
It added that as most of the major adjustments to fiscal and monetary policies have been made, debt burden is projected to decline firmly over the next few years.
Referring to media reports which it said ignored underlying reasons behind such an increase, the in order to fully understand the underlying economic realities, the statement said that there was a need to analyse the sources of increase in total public debt during last three years.
The underlining reasons include interest expenses wherein there was a preference towards short-term domestic borrowing in absence of adequate cash buffers resulted in short-term profile of domestic debt at the end of FY18.
This short-term profile led to high interest cost on debt as interest rates had to be increased significantly to curb rising inflationary pressures. Government paid Rs 7.5 trillion against interest servicing which explained 50 per cent of the increase in total public debt.
Similarly, the statement said that currency devaluation impact should be taken into account as exchange value of the rupee was maintained at an artificially high level in the past which triggered the balance of payment crisis.
Transition to market-based exchange rate regime, being an unavoidable policy choice, resulted in sharp exchange rate depreciation leading to high inflation, high interest rates, slower GDP growth and lower import-related tax revenues.
This exchange rate depreciation added around Rs2.9 trillion (20 per cent of the increase) in public debt.
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, the statement said.
Financing of primary deficit was also added as a factor to be taken into account before evaluating public debt.
The ministry said that the impact of economic slowdown due to the Covid-19 pandemic mainly resulted in higher than estimated primary deficits. Rs3.5 trillion, making 23 per cent of the increase, was borrowed for financing of primary deficit.
Moreover, the ministry elaborated on cash management. It said that Rs1.0 trillion, 7 per cent of the increase, was on account of increased cash balances of the government to meet emergency requirements as well as due to difference between the face value, which is used for recording of debt, and the realised value which is recorded as budgetary receipt of government bonds issued during this period.
The government took the revolutionary and economically sound step of not borrowing from the SBP and maintaining a cash buffer, which led to a one-off increase in debt. However, this increase in debt was offset by corresponding increase in liquid cash balances, the statement concluded.
