41% of federal budget allocated for debt servicing

Why huge amount allocated after rescheduling from IMF and Paris Club?

The whopping 41% of the federal budget 2020-21 allocated for debt servicing.In the budget for 2020/21, the country will spend Rs 315.135 billion on foreign debt servicing (interest payment), while it will spend no money on foreign loan repayment (or principal amount) – in outgoing fiscal it was Rs 1.245 trillion.

On domestic debt servicing, the economy will consume Rs 2.631 trillion. During the outgoing fiscal year, the government has spent huge amount of Rs 3.54 trillion on public debt servicing (paying interest and principal amount), against the budgeted Rs 3.987 trillion.

The government could have negotiated with domestic banks and lenders to reschedule at least half of the repayment to to allocate more money for economic revival and boost the economy. But instead, government decided to repay full amount of interests and principal debt due to domestic lenders.
For many years, this alone has become the largest allocation. Pakistan will spend around Rs 2.946 trillion of public money on interest payments and retiring principal amounts during financial year 2020-21.

But interestingly, hardly any discussion takes place on this subject. There are many in the country who consistently argues to cut the defence budget. The defense budget this year stands at Rs 1290 billion (1.29 trillion) which is 18% of the budget. Traditionally, defence was used to get the largest share in the budget.

But in last one and half decade, the rising debt has taken over defence and now gets the largest share. Thanks to the debt rescheduling of some IMF, Paris Club and other loans saved around Rs one trillion (1,000 billion) in the budget. Without having this debt rescheduling, government would have to allocate Rs 3.954 trillion (3,954 billion) instead of current Rs 2.946 trillion. That simply means that more than half our budget allocation could have been gone to debt servicing.

The borrowing, which has been made over last several years, is almost beyond the ability of this poor country to pay. This debt financing will be the major chunk of country’s total budget expenditures outlay, as already the ballooning public debt has almost paralysed the economy, where more than half of the population is living below poverty line.

The public debt of an economy increases when it is unable to meet its expenditures through own resources (tax and others) and to bridge the fiscal deficit), it borrows more from local and foreign lenders.

Pakistan’s public debt and liabilities (domestic and external) has been recorded at a huge Rs 35.207 trillion by end of March 2020, increasing by two-and-a-half-time since 2013 when it was recorded at Rs 14.29 trillion. This total public debt is 84.38 percent of gross domestic product (GDP), which at present is Rs41.72 trillion.

Of the total public debt, domestic debt was recorded at Rs 22.478 trillion at March-end. External debt and liabilities have been recorded at $110 billion. With the depreciation of rupee, the debt is increasing in rupees terms. It indicates that if dollar appreciates by one rupee against Pakistani currency, the external debt burden increases Rs 110 billion.

The interest payments on debt and liabilities also skyrocketed to Rs 2.2 trillion in the last fiscal year. The domestic interest payments on debt stood at Rs 1.75 trillion –an increase of Rs 427 billion or 32%. The external debt interest payments were Rs 377 billion –a surge of Rs 131 billion or 53%.

According to renowned economist and columnist Dr Farrukh Saleem, “From 1947 to 2008: It took us 61 years to accumulate total public debt of Rs 6, 000 billion. In 1971, every man, woman and child in this country was indebted to the tune of Rs500. In 2008 – when the PPP took over the government – every man, woman and child in this country was indebted to the tune of Rs 36, 000. We went from Rs500 per capita debt in 1971 to Rs 36, 000 in 2008.

2008-2013: It took the PPP a mere five years to take us from Rs 6, 000 billion to Rs 16,000 billion. The PPP took us from Rs 36, 000 per capita debt to Rs 88, 000 per capita debt in a mere five years.

2013-2018: It took the PML-N a mere five years to take us from Rs 16, 000 billion to Rs 30, 000 billion. The PML-N took us from Rs 88, 000 of per capita debt to Rs 144, 000 of per capita debt in a mere 5 years. Wait, the best is yet to come.

2018-2020: It has taken the PTI less than two years to take us from Rs 30, 000 billion to Rs 43, 000 billion. Imagine, the PTI has taken us from Rs 144, 000 of per capita debt to Rs 195, 000 of per capita debt in less than two years. Lo and behold, the Rs 43, 000 billion public debt does not include the exploding ‘circular debt’ which on its own stands at Rs 2, 000 billion.

For the record, the PPP borrowed an average of Rs 166 billion a month every month of its five-year tenure. The PML-N borrowed an average of Rs 235 billion a month every month of its five-year tenure. Please welcome the PTI which has so far been borrowing an average of Rs 540 billion a month every month of its 22-month tenure.

The PPP in its five-year term borrowed 23 percent of our total debt outstanding. The PML-N in its five-year term borrowed 33 percent of our total debt outstanding. Lo and behold, the PTI has already borrowed 30 percent of our total debt over the past 22 months. As a percentage of GDP, our debt has gone up from 86 percent in 2018 to 98 percent.”

Prime Minister Imran khan was used to criticise both PML-N and PPP for piling debt. But his government now piling up debt at the fastest ever speed in the history of this country. The PTI government is using the same argument used in the past by both PML-N and PPP that we are borrowing to repay debts and interests.

The PTI establish a ‘Debt Inquiry Commission’ to investigate the increase in public debt from Rs 6,000 billion to Rs 30,000 billion over a 10-year span (ruled over by the PPP and the PML-N). Who will now investigate the Rs 13,000 billion worth of additional debt that has been taken on by the PTI government over in just 22 months?