Debt Accumulation Soars in Pakistan, Reaching a Staggering Rs81 Trillion

Pakistan’s financial landscape faces a daunting challenge as the nation’s total debt and liabilities have soared to a staggering Rs81 trillion, marking a significant increase of Rs8.4 trillion from the previous year. This alarming figure now represents three-quarters of the country’s GDP, overshooting the statutory limit set by the Fiscal Responsibility and Debt Limitation Act by 15%.

The State Bank of Pakistan has reported a 12% increase in debt accumulation, averaging a daily rise of Rs31 billion. Despite a stable exchange rate and limited foreign funding, the debt situation remains a cause for concern4. The rupee’s value has shown signs of stability, aiding in the control of external debt growth, which has been further restricted by Pakistan’s low credit ratings, deterring foreign commercial banks from offering new loans.

Successive governments have implemented austerity measures, but these have largely remained on paper, with no substantial impact on debt reduction. No significant reforms have been introduced to address the root causes of debt growth, and political parties have shied away from the difficult decisions required for debt restructuring.

The current government, led by Prime Minister Shehbaz Sharif, has faced criticism for approving supplementary grants for various purposes, including honorariums and renovations, while also providing subsidies. The finance ministry’s initial budget for interest payments was Rs7.3 trillion, which is now expected to increase to Rs8.3 trillion. The cost of servicing the debt is tied to the central bank’s policy rate and negotiations with commercial banks.

Public Sector Enterprises continue to add to the debt burden, with liabilities reaching Rs3.8 trillion, primarily borrowed to cover their deficits. The government has yet to decide on the fate of these enterprises, whether to retain or sell them.

The external debt has remained stable at Rs33 trillion, thanks to the rupee’s appreciation against the US dollar and the absence of anticipated foreign financing from institutions like the IMF and the World Bank. The central bank’s intervention in purchasing $6 billion from the open market has helped maintain external debt levels at around $130 billion for the fiscal year.

As the IMF evaluates Pakistan’s situation for a potential new bailout package, the country’s debt to the IMF stands at Rs2.2 trillion. Domestically, the federal government’s debt has risen to Rs43.4 trillion, a 12% increase, with Rs5.8 trillion spent on servicing the total debt. This expenditure has surpassed the net federal income, highlighting the urgency for a robust debt management strategy.

This financial burden will persist until significant reforms are initiated. These include reviews of provincial projects, winding up of ministries operating in areas now under provincial control, and addressing defence and debt expenses.

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