ISLAMABAD: With around 40 per cent increase in Pakistan’s public debt and liabilities in 15 months, the government on Friday conceded major violations of the Fiscal Responsibility and Debt Limitation Act (FRDLA) for massively exceeding debt acquisition limits.
In its debt policy statement laid before the parliament, the ministry of finance noted that total debt and liabilities that stood at Rs29.879 trillion at the end of the fiscal year 2018 crossed Rs41.489tr at the end of September 2019, showing an increase of Rs11.6tr or 39pc.
At the end of the fiscal year 2019, the total debt and liabilities were reported to have increased by about 35pc or Rs10.344tr to touch Rs40.223tr.
The report said the FRDLA required that the federal government take measures to reduce federal fiscal deficit and maintain total public debt within prudent limits thereof. As such, it was required to limit the federal fiscal deficit excluding foreign grants to 4pc of gross domestic product during the three years, beginning from the financial year 2018-19 and maintaining it at a maximum of three and a half per cent of the GDP thereafter.
“The federal fiscal deficit (excluding grants) was recorded at Rs3,635 billion or 9.4pc of GDP during FY 2018-19, thus, remaining higher than the threshold of four per cent,” said the debt policy statement.
In a statement laid before parliament, finance ministry admits to debt limit violations
The ministry, however, justified this due to a series of factors, most of them emanating from its policies. It said the one-off factors, which were not expected to carry over into FY 2019-20, contributed around 2.25pc of the GDP towards federal fiscal deficit. These included delay in renewing telecom licences, delay in sale of envisaged state assets and weaker than anticipated tax amnesty proceeds contributed around 1pc of the GDP. A shortfall in the transfer of State Bank profits contributed an additional 0.5pc of the GDP.
Profit of the State Bank of Pakistan (SBP) witnessed a steep decline during FY 2018-19 as the SBP incurred heavy exchange rate losses on its external liabilities. Payments of accrued interest on account of re-profiling of the SBP borrowing at end June 2019 also contributed 0.75pc of GDP in federal deficit.
In addition, the finance ministry said some other factors were beyond the control of the fiscal authorities, which contributed to higher than budgeted federal fiscal deficit during FY2018-19. These included a sharp rise in domestic interest rates and exchange rate depreciation (that escalated the debt servicing burden), legal constraints on the revenue side and an overall slowdown in the economy resulted in lower than budgeted revenue collection.
The policy statement said the law also required the government to ensure that within a period of two financial years, beginning from the fiscal year 2016-17, the total public debt shall be reduced to 60pc of the estimated GDP by end June 2018.
“However, total public debt to GDP ratio reached 72.1pc while total debt of the government to GDP ratio was 66.5pc. Total public debt and total debt of the government as percentage of GDP stood at 84.8pc and 76.6pc, respectively at end June 2019, thus, increasing further during the FY 2018-19,” the finance ministry conceded.
Apart from fiscal deficit, it said, unprecedented revaluation loss on account of currency depreciation and build-up of liquidity buffer contributed significantly towards the increase in debt to GDP ratio during FY 2018-19.
The ministry also put on the record that total debt and liabilities increased by 86.3pc of GDP at the end of FY18 to 94.3pc of GDP at the end of September 2019. It said the government’s domestic debt increased by Rs6.234tr or 38pc in 15 months (end-June 2018 to end-September 2019). It said the government domestic debt that stood at Rs16.416tr at end-June 2018 increased to Rs20.73tr by end-June 2019 and reached Rs22.65tr at end-September 2019.
Government’s external debt during the 15-month period also increased by 36pc or Rs2.8tr to Rs10.598tr from Rs7.796tr. External liabilities on the other hand increased by 160pc to Rs1.6tr by end of September 2019 from Rs622bn in June 2018.
The finance ministry, however, said it fulfilled the limit on new sovereign guarantees. It said the law required the government not to issue new guarantees for any amount exceeding 2pc of GDP in any financial year and “during FY2018-19, the government issued new guarantees including rollovers amounting to Rs489 billion or 1.3 percent of GDP”.
Pakistan’s External Debt and Liabilities (EDL) represent debt and liabilities of public as well as the private sector. The EDL part that falls under government domain is the debt which is serviced out of consolidated fund and owed to International Monetary Fund (IMF) whereas remaining includes liabilities of central bank, debt of public sector entities, private sector and banks.
“EDL was recorded at $106.3 billion by end June 2019, registering an increase of $11.1bn compared to an increase of $11.8bn recorded a year earlier. One half of the increase in EDL was due to rise in SBP liabilities in the form of deposits placed by bilateral partners (Saudi Arabia, the UAE, Qatar),” the ministry said, adding “these deposits only provide balance of payments support, add to foreign currency reserves and do not come as an extra resource in the budget”.
Short-term external public debt maturities as percentage of official liquid reserves stood at 159pc at the end of June 2019 compared with 81pc at the end of June 2018. The higher proportion of external public maturities falling in a year compared with the level of official liquid reserves resulted in an increase in this ratio. Around 35pc of total public debt stock was denominated in foreign currencies, exposing public debt portfolio to exchange rate risk.
Published in Dawn, February 1st, 2020