High interest payments, dependence on debt for consumption, and challenges in shifting funds to productive investment. Pakistan Institute of Development Economics
Thursday, December 26, 2024
ISLAMABAD (UrduPoint News International/ Pakistan Point News - 26th December, 2024 ) Pakistan’s debt has declined due to the policy rate cut but concerns over fiscal sustainability remain as there are challenges in paying high interest rates, relying on debt for consumption and shifting funds to productive investments. Speaking to Wealth Pak, Dr. Nasir Iqbal, Head of the Macro Policy Lab at the Pakistan Institute of Development Economics, stressed that the key to sustainable debt lies in its purpose. He explained that when debt is used for investment and the return exceeds the interest rate, then debt becomes sustainable. He pointed out that in Pakistan’s case, most of the debt was for consumption, such as meeting current expenses, rather than growth-oriented investment. Reliance on debt for non-productive purposes means that the country faces difficulty in meeting its obligations over time. He said that Pakistan’s debt cannot be sustainable unless it is used for investment purposes, increases productivity and profits exceed interest payments. A major concern for him is the current method of borrowing. The country has moved away from borrowing directly from the central bank, opting instead to borrow from private banks. This shift has increased the cost of servicing debt as the interest rates on loans from private banks are very high. For example, in the recent past, the interest rate on domestic loans was around 22 percent, which played a significant role in allocating an increasing portion of the national revenue to debt service.
He said that the reliance on borrowing to service previous debts meant that Pakistan had to keep borrowing to pay off old debts, creating an unsustainable cycle. Ahmed Mobin, senior economist at S&P Global Market Intelligence, echoed similar concerns and offered a sobering view of the country’s debt sustainability. He explained that Pakistan’s external debt servicing is likely to be around 4 percent of GDP and 16 percent of total foreign exchange earnings over the next five years. He said that domestic debt servicing is expected to average 15 percent of GDP in the coming period. This is compounded by the fact that Pakistan has issued floating-rate debt at a rapid pace, meaning that debt servicing costs will only gradually come down. He stressed the urgent need to address the debt servicing issue and said that Pakistan has one of the highest interest payments in total revenue among emerging markets. He stressed the importance of meeting performance criteria under the IMF Extended Fund Facility. He said that meeting fiscal sustainability targets and obtaining timely concessional financing are important for Pakistan to manage its debt servicing. These targets, which include maintaining fiscal discipline and ensuring continuous financing, are seen as key to avoiding a crisis. Without addressing the underlying structural issues in the economy, especially those related to fiscal discipline, the country’s debt burden could become even more unmanageable. Although Pakistan’s debt has come down, the underlying problems of fiscal management and unsustainable debt persist.
He said the country faces a growing challenge in shifting its debt structure from consumption-based borrowing to investment-based borrowing. Debt used for consumption cannot be sustained in the long run. Without increasing productivity and incorporating debt into growth, Pakistan may face an even bigger debt crisis in the coming years. To ensure its fiscal sustainability, Pakistan must implement structural reforms that focus on increasing economic productivity and reducing reliance on debt for consumption.
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