Debt disinformation

In the heat of the electioneering, a lot of disinformation is being spread about the indebtedness of the country and the government. The most popular refrain is that the debt added during the past five years was more than the debt accumulated in the preceding 65 years of the country’s history.

Full year data is not yet available for 2018. In 2017, the total public debt was Rs21.4 trillion, rising by Rs7.1 trillion from Rs14.3 trillion in 2013. The country’s debt is, however, more than just public debt. The former is called total debt and liabilities while the latter comprises federal government’s external debt, domestic debt and the IMF loans.

In the case of total debt and liabilities, the latest available data is for March 2018 when it amounted to Rs28.3 trillion. In 2013, total debt and liabilities were Rs16.3 billion. Again, the addition of Rs12 trillion was still less than the debt accumulated by the country until 2013.

The most recent information relates to what the State Bank of Pakistan categorises as the central government debt. Even this information is for 11 months of the fiscal year 2018. By the end of May 2018, the central government had accumulated a debt of Rs16.5 trillion. At the end of June 2013, this amount was Rs13.9 trillion. Once again, the difference between the two periods is far less than the debt piled up until 2013.

Thus, the notion of the country having contracted more debt in the last five years than in the entire period before is not based on facts. The comparisons also use absolute figures, ignoring the fact that a rupee or a dollar today is valued far less than in the past. Standard comparisons are made in terms of debt to GDP ratio.

In June 2013, total debt and liabilities of the country were 73% of the GDP. This increased to 82.3% in May 2018. Total external debt and liabilities increased from 27% of the GDP to 30.8%, while domestic debt of the government rose from 42.5% of GDP to 46.7% of GDP.

A comparison made for public debt in 2017 showed that Pakistan was far behind Egypt, India and Sri Lanka. Useful though it is to get a peer group perspective, debt to GDP ratio is not the only way to assess the burden of debt.

There are at least four other ways to judge the ability to repay. Between 2013 and 2017, gross public debt to revenue ratio improved from 480.1 to 433.6 and total government debt to revenue ratio improved from 452.1 to 397.7. Debt service to revenue ratio improved from 40.5% to 38.3%, but the debt service to GDP ratio deteriorated from 5.4% to 5.9%.

The rising debt burden clearly relates to the failure to reform the tax system and install a pro-export regime. It also reflects the poor capacity to make productive use of borrowed money. True, there is a debt problem, but the news about the existence of a serious debt crisis is vastly exaggerated. Domestic debt is much higher and costlier than the external debt. The feeling that we can print rupees but not dollars keeps the focus on external debt. Domestic debt is largely for consumption while the external debt is mostly for investment. Both, however, need to be dealt with in a proper debt management strategy. Unfortunately, the manifestoes only misstate the problem and skirt around the solution.

Published in The Express Tribune, July 13th, 2018.

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