Pakistan’s public debt has risen from Rs. 3 Trillion in 2000-01 to Rs. 15.41 Trillion in 2013-14. Pakistan’s debt servicing stood at 76 percent of Pakistan’s foreign exchange reserves, 28 percent of its export earnings and 46.6% of total revenue in 2013-14. This volume delineates critical issues related to public debt in Pakistan and identifies a possible road map. It contains both conference report and selected papers on public debt, thus making this as an important resource for discussions on national debt.

About 68 percent of public debt in Pakistan is expensive domestic debt, and 90 percent of debt servicing takes place to retire domestic debt. The reasons for this sharp increase in public debt, as explained by Sakib Sherani, are mainly rooted in the management of the economy including exchange rate correction, insufficient tax reforms, lack of power sector reforms, weak debt management, booking of past unpaid bills, and sharp fall in net external transfers. According to Dr. Kaiser Bengali, there has been a sharp increase in programme loans in Pakistan over a few decades which has only added to increasing liability, contrary to project loans which add up to the assets of the economy.

During the last seven-ten years, the external debt in Pakistan has escalated to $ 66.5 billion from $40.5 billion. All efforts of the current government have been to generate foreign exchange which is adding to external debt stock. IMF has loaned out an amount of $ 6.6 billion during the last three years, for BOP support, however it is uncertain that how this debt will help us in improving productivity. In 2012, government accounted for 90 percent of all incremental borrowing. Since then it has reduced, and government is taking 70% of commercial banks credit which still narrows down the room for private borrowers. As per Juvaria Jafri, increased public debt must be regarded as a hindrance to economic freedom, which is a mean to macroeconomic growth and stability.

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This report is a product of the PRIME Institute’s National Debt Conference held in Islamabad on October 26th, 2017. Supported by Friedrich Naumann Foundation for Freedom and the National Endowment for Democracy, the objective behind the conference was to initiate an open and informed dialogue on the status of public debt in Pakistan and its consequences for the country’s future.

The conference provided an excellent opportunity for all stakeholders to share their thoughts on the subject. Though public debt is essentially a political economic issue, the dialogue in that conference took place in a non-partisan environment. It is the government which is ultimately responsible for decisions on debt. However, instead of making the forum as an accountability instrument or a charge sheet against any government, participants presented a cogent analysis, and precise policy recommendations and alternatives.

This report, therefore, serves as a resource paper on the subject of public debt. None of the contents of this report are owned by the author and is reproduced work based on the presentations and the speeches delivered at the conference, this note is to duly acknowledge all the speakers for their content reproduced in this report.

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It is a long held economic belief that higher level of public debt breeds risk for a country’s economic and political freedom. Political freedom is compromised when the government borrows money from various International Financial Institutions (IFIs) and donor countries, while the economic freedom is jeopardized when the debt is serviced through printing of money, heavy taxation or further debts.

Pakistan’s public debt plight is becoming increasingly unsustainable. In actuality, the public debt to GDP ratio stands at 66.3 percent as of 2018, with the stock of total public debt rising by Rs. 1.4 trillion during the first half of the current fiscal year.  Presently, the debt servicing to revenue stands at 41 percent – exceeding the government established sustainability criterion of 30 percent.

Although debt can be conducive to growth and development, it can be detrimental if not put to optimal use – as has been the case in Pakistan. For most part, twin deficits have been responsible for the mounting debt burden. In particular, the burgeoning budget deficit has been the underlying factor in excessive government borrowings. The budget deficit and consequently the public debt has been increasing owing to plethora of factors such as inefficiencies of State-owned Enterprises, excessive administrative costs (current expenditures), poorly targeted infrastructure and welfare spending etc.

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During the last decade, Pakistan’s economy tackled several challenges: the energy crisis, terrorism and political instability. These stifled the country’s capacity to focus on macroeconomic stability resulting in current account and external account imbalances. The newly elected government of Pakistan took office in August 2018 and elected Imran Khan, chairman of the winning political party, as the 22^nd prime minister of Pakistan. Having severely criticized the economic reforms agenda of governments over the last 22 years, this new government promised the public to come up with a strong mandate for economic reforms. These reforms vowed to not only focus on economic growth and development but also to improve the living standards of the poor. The Pakistan Tehreek-e-Insaaf (PTI) government guaranteed to increase the tax base, reform the Federal Bureau of Statistics, generate private sector activity, establish a 5 million unit housing project and improve foreign direct investment and remittances.

However, ever since the PTI government took office, like their predecessors they have claimed that Pakistan’s treasury is in fact empty. They expressed worry over the country being in need of at least 18 billion dollars. This would then enable the government to finance a severe short fall in foreign exchange arising from mounting import bills and debt financing, triggered by a sharp fall in exchange rate in term of dollars.

Pakistan landed into a macroeconomic crisis as early as March 2018 when the overall public debt burden reached Rs 28,297 billion on March 31, 2018. Amounting to every citizen being indebted with Rs1,36,700 on average. While there has been a continuous rise in import bills, the export to GDP ratio has declined from 11.2% in 2007 to 7.2% in 2017. To pacify the yawning gap between exports and imports the PTI government has charted down a strategy. One instance is of the government trying to assist exporters by discovering new markets overseas and working to improve the ease of doing business rankings. Furthermore, Pakistanis employed overseas have been requested to send their money back to Pakistan through formal banking channels so that country’s FOREX can be increased. However, with Pakistan’s low credit rating, the government knows it is difficult to raise any amount above two to three billion dollars from international markets. Another external factor which seem to have aggravated the financial crisis within the country is the rapid rise in oil prices in international markets.

Despite PTI’s initial reluctance to approach international agencies for short term economic bailout plans, the Finance Minister has entered negotiations with IMF, requesting for another bailout program. More than 35 percent of Pakistan’s public debt is external, and most of this debt is taken from multilateral lending institutions like IDP, ADB, IMF and World Bank etc.  This policy brief critically analyses Pakistan’s approach to an IMF bailout program. It further sheds light on the historic context to provide a rationale, if any, in benefiting to stabilizing Pakistan’s macro economy through availability of short term lending support by IMF in coming months.

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