Zafar Iqbal
The State Bank of Pakistan (SBP) has recently published the total debt and public debt figures for Pakistan as of the end of June 2024. The total public debt of the federal government comprises domestic debt, external debt, and debt with the International Monetary Fund (IMF).
As of the end of the 2023-24 fiscal year, the magnitude of public debt stood at Rs 71,245 billion, showing an increase from Rs 62,881 billion at the end of the previous fiscal year. This represents a growth rate of 13.3%. Although the level of public debt as a percentage of the GDP decreased significantly from 75% to 67.2% during this period, this positive development is attributed to the high rate of inflation experienced in 2023-24.
The nominal GDP increased by 26.4% during the year, indicating no significant decline in the annual growth rate of public debt. Over the last decade, the annual growth rate has been 14.8%, only slightly higher than the growth rate of 13.3% in 2023-24.
One of the key factors preventing faster growth in public debt is the actual appreciation in the value of the rupee during 2023-24. The rupee value of public external debt has shown near-zero growth due to the appreciation of the currency, although the dollar value has increased from $84.0 billion to $86.4 billion in the same period.
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The long-term growth of public debt has been exponential, with the debt reaching Rs 71,245 billion at the end of 2023-24 from Rs 14,291 billion in 2012-13, indicating an average annual growth rate of 14.6%. As a result, each citizen of Pakistan carries a debt burden of almost Rs 300,000.
The significant increase in the absolute value of the public debt in 2023-24 is primarily due to large borrowings, mostly from domestic sources, which were necessary to finance the substantial budget deficit of Rs 7,725 billion incurred during the year, especially due to limited access to external financing. The high cost of debt servicing, amounting to Rs 8,159 billion in 2023-24, has contributed to the large budget deficit, leading to a vicious cycle of debt accumulation and higher debt servicing requirements.
Furthermore, there has been a considerable increase in the effective interest rates on both domestic and external public debt since 2017-18, with the interest rates on domestic debt more than doubling to 16.7% and the average interest rate on external debt also doubling from 2.1% to 4.5%. The inability to attract substantial net inflows of concessional multilateral and bilateral debt has contributed to this increase.
Domestic debt has also witnessed significant changes in its composition between long-term and short-term debt. The reliance on bond flotation has substantially increased, while the National Savings Schemes, which are crucial for household savings, have declined and now constitute only 5.9% of the total public domestic debt. Reviving these schemes and encouraging shorter tenures for bonds are essential to stimulate household savings, especially with potential lower interest rates due to a drop in inflation.
Looking ahead to the rate of accumulation of public debt in 2024-25, the original projection of the budget deficit for this year was Rs 8500 billion, with the majority of the financing expected to come from domestic sources. However, there are indications that the budget deficit may be significantly larger, with potential shortfalls in non-tax revenues and FBR revenues. The federal budget deficit could approach 8% of the GDP in 2024-25, necessitating increased domestic financing and limited access to external financing.
With the potential for increased market pressure on interest rates, the ability of the SBP to further reduce the policy rate may be constrained, particularly at a time when there is a need to bolster household savings.
