Whatever its shortcomings, Pakistan’s coalition government has prevailed for almost five years without a coup, or execution of a top leader and is on track to become the longest-serving civilian government in the country’s history.
Pakistan is experiencing a linear increase in debt. With high debts, interest payments also increase, thus increasing both debt servicing and interest payment burden. Hence, higher debt levels make stabilisation more costly and induce shirking by governments. Previously, our debt had a higher dollar component while now rupee component has increased rapidly due to internal/ bank borrowing. The ‘local’ component has implications for the budget whereas the ‘foreign’ debt component affects the balance of payments equation, although that part is known to be used for budgetary support as well. Due to increasing debt stock, the medium term outlook for Pakistan is quite bleak. Any further borrowing should be strictly need based with a strict eye on the interest rate, maturity period, amortisation payments and currency fluctuations.
The government needs an effective debt management policy whereby debt obligations are assessed on a five to ten year horizon. Short term macroeconomic stabilisation tools include the use of monetary policy to control short-term nominal interest rate, fiscal policy to regulate spending decisions on public goods, and decisions related to financing public expenditure either by raising revenue through taxes or incurring debt. Not cutting government spending leads to further increase in debt, high debt servicing and interest payments. Higher debt level necessitates higher taxes. If a fiscal policy curtails expenditure but at the same time does not increase tax collection, the effects of a recessionary shock linger longer than the shock itself because governments are tempted to use inter-temporal margins for further fiscal consolidation. Some governments, while reducing expenditure also reduce income tax collection to decrease the impact of economic shocks on households, which is unsustainable in the long run. This is paradoxical because by not to raising taxes the government keeps the deficit high as before.
Moreover, over the last one year, the government has piled up on average Rs 11,000 as public debt on every Pakistani. Independent economists believe that the depreciating Pakistani currency is also a reason for the mounting debt burden in rupee terms. They believe that debt obligation on the people of Pakistan is increasing substantially day-by-day due to large trade deficit, saving-investment gap, slow growth of revenue and rapid growth of public expenditure. Servicing and repayment of principal huge public debt is putting a burden on the country’s exchequer and also leaving the most neglected social sector i.e. health and education with less money to be developed, ultimately hitting Pakistani citizens hard. Every military and democratic administration borrowed recklessly to bridge the budget deficit (revenue and expenditure gap) without thinking about its future consequences on the nation and the economy.
If the government does not start taking steps against the debts of Pakistan, unfortunately Pakistan would be in a great mess, leaving the citizens of Pakistan earning less and paying more expenses. With increasing debts, economy would turn bad and people of Pakistan would have to face huge losses.
