Public debt a challenge for next govt: Shamshad

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ISLAMABAD  – Federal Minister Finance, Planning Development and Reforms Shamshad Akhtar has said that the country’s debt to GDP ratio is 72 percent and it could go up to 74 percent by end current fiscal.

Management of the public debt would be a challenge for the next government and it is linked to stability issues of economic growth, said the minister in her opening remarks at a seminar on ‘Public Debt – Issues, Challenges and Way Forward. The seminar was organised by the Ministry of Planning Development and Reforms.

The minister said that the country’s total public debt at end-May 2018 stood at Rs24.5 trillion, of which domestic debt was Rs16.5 trillion while the external debt was Rs8 trillion. The country’s external debt at end of 2017-2108 stood at $69.5 billion while adding other external liabilities with it, the total volume of external debt and liabilities stands at $92.2 billion at end of the fiscal.

Dr Shamshad said that the increased exchange rate also impacting the external debt and so it balloons in real terms. Currently, the country’s debt to GDP ratio is 72 pc which could go up to 74pc by end this fiscal. The fiscal responsibility and debt limitation act calls for limiting debt to GDP ration to 60percent but by the end of the current fiscal there will be around 14 percentage points’ slippage from this limitation.

She further maintained that the Public debt should not be measured in isolation whereas it is governed under Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 and according to this Act, public debt has to be reduced to 60 percent by 2017-18 and thereafter a 15-year transition has been set towards a debt-to-GDP ratio of 50 percent.  The minister said that the public debt witnessed average annual growth of 11.3percent during FY 2013 to May 2018.

She informed that public debt mainly increased due to fiscal deficit, IMF loan, balance of payments requirements and rupee depreciation against the dollar. She said that around 33 percent of total public debt is denominated in foreign currencies with an average life of around 8 years. The minister further stated that during the last five years, several structural change were witnessed in the composition of external public debt with increased share of commercial borrowing however, there is a need to reduce reliance on this source of financing.

The minister suggested that government has to emphasise on obtaining concessional and long-term external financing to avoid higher debt servicing and putting in place fiscal consolidation measures by reducing fiscal deficit to below 4 percent as mentioned in Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 and reducing the public debt to GDP ratio to 50 percent through increasing tax revenue and expenditure management.

She said that effective exchange rate management and effective fiscal deficit is the key to ultimately managing our debt situation effectively.

Dr Shamshad said that internationally, world economies are now moving from low interest rate to tightening of their monetary policy [high interest rates]. Same would be the response of domestic economy. So, in years and even months to come, we would be in much difficult situation with increased interest rate in international market.

Pakistani imports are high and for July-June 2017/18, it has been recorded at 52.9 billion at exports at only 20.4 billion with a historic huge trade deficit of 32.49 billion. This is unsustainable and that’s why we are facing high Current Account Deficit (CAD), she said.

The minister said twin deficit i.e. fiscal deficit and current account deficit is a challenge. “What we have to do is to really have real sector economic growth very fast, diversify our exports, get good business environment institutionally and politically, then we would be able to attract [international] inflows,” she said.

Dr Shamshad further said that once we have high level of exports and high level of international equity inflows, the whole thing will start changing.

She said that in Pakistan, investment to GDP has been historically very low and volatile. There is a need to invest in very sensible manner and must increase investment to GDP ratio for development.

The minister suggested that except other projects, capital projects, that maintain or improve assets, be given priority.

The consumption to GDP ratio is much higher than investment to GDP ratio. We have to have effective exchange rate and debt management.

Pakistan being a developing country, containment of expenditures is hard, as it has to pursue growth for infrastructure and social development. But at the same time when you are unable to mobilize your domestic resources then you have to go for official assistance and commercial loans.

Pakistan’s problem is that, it has very low domestic resource mobilization. It should go for expansion of tax net and improve tax administration.

She suggested that government has to look at fiscal consolidation. The increased fiscal deficit (or budget deficit) is one of the instrumentals for growing public debt. Pakistan fiscal deficit to GDP ratio was 4 percent of the GDP for the fiscal year 2017-18 and it has to be brought down to 3.5 percent by 20019-20.

Concluding her speech, the minister reiterated that debt is a reality for growing economies. Pakistan is also a developing country and it has to pursue its high growth ambitions to expand its infrastructure and has to invest in the social uplift of the country.

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