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EDITORIAL: Earlier this week, Federal Minister for Economic Affairs Khusro Bakhtiyar noted that the external debt must be dealt with care. However, debt stock is only a symptom; efforts must be made to address the causes of ballooning debt. If external deficit continues to grow, external debt cannot be reduced. The root-cause of both domestic and external debt is the growing fiscal deficit. Without first putting the fiscal house in order, rise in debt cannot be controlled. Within debt management, there is a need to strike a balance between domestic and foreign debt. Over-reliance on either is not good. Pakistan faced a severe debt crisis at the time of nuclear tests in 1998 when its external debt peaked at 50.9 percent of GDP in 1999, while domestic public debt was at 47.4 percent of GDP. Thereafter, the rescheduling by the Paris Club, GDP re-basing, and a spurt of decent economic growth in 2002-07 changed the landscape.

In 2007, the external public debt to GDP ratio came down to 23.4 percent while domestic debt shrunk to 28.3 percent. This freed up space for private sector credit off-take and resulted in the launch of long-term projects in fertilizer, telecom, and banking. Private credit to GDP peaked to 27 percent in 2007. At that time, and thereafter, foreign investment came with no condition for domestic partnership. Almost none of the investments made at the time are listed on the stock exchange. For the past few years, profit repatriation from these companies is also straining the external account. This must be addressed as well.

Various factors have led to an unabated growth in fiscal deficit during the last decade. Political inductions and interference in Public Sector Enterprises (PSEs) led to PSE losses and drained fiscal resources. Dividend- paying capacity of state-owned energy companies was choked by growth in circular debt - which started piling up in 2008. Economic growth slowed down, and thus began the slide down the slippery slope of debt accumulation.

By 2018, government domestic debt had ballooned to 47.4 percent of GDP while external government debt reached 22.5 percent. Today, domestic public debt is reaching alarming levels. Its growth has gone largely unnoticed because external debt repayment is persistently posing a challenge due to thin base of foreign exchange reserves. However, domestic debt has become a systemic risk. It crowds out private sector investment as private credit to GDP ratio has fallen to 17 percent from its peak levels of 27 percent in 2007. Inflationary pressures have emerged due to monetization of debt, and capital has been allocated to inefficient public resources. Growth of domestic debt should have slowed down. In the absence of control on fiscal deficit, reliance naturally switched to external debt.

Reliance on external debt also increased to finance growing external deficits - current and capital/financial accounts in the balance of payment. In the past two years, fiscal deficit has touched its historic limits. That has pushed the need for debt even more. On external front, gross external funding need is $38 billion for 39 months of IMF programme.

In the short-term, there is no other option but to rely on external debt. The problem is that both the domestic and external debts are growing - reaching 54.6 percent and 28.6 percent of GDP, respectively. Till March 2020, debt levels in terms of GDP marginally fell on both external and domestic fronts. The situation has changed in the aftermath of Covid-19; the fiscal deficit is once again growing out of bounds due to the pandemic-related stimulus and slowdown in tax growth.

Outflows of market-based foreign flows, and short-term nature of external debt have increased the need for external public debt to finance external deficits. Commercial loans are either not available or are offered at exorbitant rates. Thus, concessionary funding by the International Monetary Fund (IMF), the World Bank (WB), the Asian Development Bank (ADB) and the likes had to be sought instead. At the moment, the government does not have much choice. To move forward, it must work on reducing the fiscal deficit, and to keep the current account deficit under check. For addressing the fiscal deficit, structural reforms in taxation, PSEs, and energy are paramount. These will eventually help in controlling current account deficit as exports can only grow substantially by addressing these structural issues.

The structural woes cannot be dealt with in the short run. The PTI government must work on improving governance in energy sector, PSEs, and of taxation. Until that happens, within external public debt, the government should look at increasing the maturity profile of debt ,i.e., replacing short-term debt with long-term one, whether concessional or market based. Moreover, the country's economic sovereignty is at stake due to overreliance on multilateral and bilateral flows. On one hand, the government is forced to agree to IMF terms. In case of bilateral loans, foreign policy can also be compromised. External debt cannot be dealt with care without extending external debt maturity profile, using indigenous energy and food resources, lowering fiscal deficit, and most importantly, dealing with energy circular debt once and for all. Else, the firefighting may continue indefinitely.

Copyright Business Recorder, 2020

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