In the fiscal year 2023-24, 80% of the borrowed amount was used to repay the interest payments
The government must compromise its expenses and rationalize subsidies
Huzaifa Abbas
Shockingly, in the fiscal year 2023-24, 80% of the borrowed amount was used to repay the interest payments. But who do we pay all that large amount of money? How much do we owe and to who? To break down, there are two types of debt, internal and external. In simple words, to organizations we owe in PKR can be referred to as internal debt, and to those who we need to pay back in dollars can be called external debt. Let’s dive deeper into some facts and figures of internal and external debt.
Pakistan owes a total of $100 billion External Debt (as of fiscal year 2023-24) which is equivalent to 38% of the total debt amount. 35% of this amount is taken from multilateral organizations such as IMF, Asian Development Bank, and World Bank. 20% was taken through bilateral relations from countries, among which $14 billion from China, $5 Billion from Japan, and another $2 Billion from Saudi Arabia. The remaining 45% was borrowed in the form of bonds that includes Euro Bonds, Commercial Banks, Naya Pakistan Certificates. Now the question arises, how is Pakistan going to pay back?
In the fiscal year 2023-24, 60% of the total revenue came from tax and non-tax sources, the rest 40% gap was filled through borrowing, out which 35% was paid in interest payments. In the next fiscal year, it is expected that all the borrowed amounts would swipe out in debt repayment, since the external creditors need to be repaid in dollars, Pakistan has to borrow more dollars for repayment.
Let’s discuss the Internal Debt. Pakistan owes $170 billion to domestic organizations, which is 62% of the total. These are mainly borrowed from private institutions, banks, and saving schemes. To repay, the government prints new money and pays the local creditors in PKR. New money gives birth to new problems domestically which are as follows.
The first among the list is Inflation, since more money now chase the same amount of resources. The price hike would not be favorable for a large proportion of Pakistan’s population.
Crowding out being the second major problem, where the domestic banks seeing government of Pakistan a safe borrower lends out almost all its loan, leaving less amount for the private investors to borrow, that too on high interest rates. In 2006-07, 70% of the bank’s loan was lent to private investors and 30% to the government, whereas in 2023-24, the situation is reversed with 70% to the government and 30% to the private sector. Such a huge amount to a single entity is a high risky job.
In a situation where 40% of our expenses are covered through debts, in addition to 89% of our total expenditure is on current expenses and little do we spend on development programs, the economy might worsen in the upcoming times. The total debt would be greater and negligible would be our growth, as a result decreasing our payback capability.
To avoid such a situation, we must increase our Tax to GDP ratio up to 12%. The government must compromise its expenses and rationalize subsidies. The best and easy way of reducing government expenses and subsidies is to privatize the loss-making state-owned entities.
Read: The Invisible Concessions and Waivers
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Hailing from Quetta, Balochistan, Huzaifa Abbas is student of School of Economics, Quaid-e-Azam University Islamabad
