Islamabad deserves debt relief from all creditors urgently, says economist

ISLAMABAD: Several low-income countries (LICs) including Pakistan face severe debt crisis and deserve to receive debt relief from bilateral, multilateral and private creditors urgently.

Pakistan’s renowned economist Dr Ashfaque Hassan Khan, who is currently serving at the National University of Sciences & Technology (NUST), has come up with a detailed research work titled ‘Sinking in debt: A framework for debt relief for low income countries’ and argued that Pakistan’s current debt situation is far worse than many of the LICs and hence it deserves to receive debt relief urgently.

Pakistan’s debt situation has been worsening since 2008, but deteriorated at a speed never witnessed before since 2019. Pakistan’s external debt and liabilities have been growing at differing pace since 2000. They grew at an average rate of 1.4 per cent per annum during 2000-2007; the pace accelerated to 6.2pc per annum during 2008-2015; the pace further accelerated to 8.6pc per annum during 2016-2023. By December-end 2023, Pakistan’s external debt and liabilities stood at $131.4 billion – rising from $36.5 billion in 2000. In other words, Pakistan added almost $95 billion external debt and liabilities in just 23 years as against $37.1 billion in the last 53 years prior to the year 2000, that is, since independence in 1947.

More importantly, Pakistan added $66.4 billion in total external debt and liabilities of $131.2 billion or 51pc during the two lost decades (Decades of the 1990s, and 2008-18). Public debt, on the other hand, is influenced by the size of the budget deficit, rate of depreciation of the currency and interest rate.

Like external debt and liabilities, the rise in public debt exhibited different pace since the year 2000. Public debt grew at an average rate of 8pc per annum during 2000-2007; accelerated at the rate of 16.5pc per annum during 2008-18; and grew at a dangerously high level of 21.3pc per annum during 2019-2023. Devaluation of Pakistani currency and the persistence of unprecedentedly high interest have contributed enormously to the rise of public debt in Pakistan.

With rise in public and external debt over the years, especially during the last five years (2019-2023), Pakistan’s debt servicing liabilities has turned out to be far worse than the many LICs. Devaluation and the persistence of keeping interest rate high have created serious budgetary problems for Pakistan, especially during the last five years. Interest payment as percentage of total revenue continued to surge since 2018-19. It was 28.7pc in 2017-18 but increased to 42.7pc in 2018-19 and further reached to an all-time high at 59.1pc by 2022-23.

In other words, almost 60pc revenue (tax and non-tax revenue combined) was consumed by one budgetary item, that is, interest payment. With respect to tax revenue only, interest payment was almost 34pc in 2017-18 but surged to 72.8pc by 2022-23. In other words, Pakistan consumed almost three – fourth of its tax revenue for interest payment. More alarmingly, interest payment alone reached over three times the development expenditure and 35.3pc of total expenditure. Hence, devaluation and high-interest rate policies have seriously affected Pakistan’s economy and made Pakistan even far worse in the comity of developing countries in general and in LICs in particular as externally debt distress country, he added. He suggested that bilateral Creditors may suspend their debt repayment for 10 years. Besides, it is proposed that they may enter into various debt swap arrangements with the eligible countries. This will be a great help for the eligible LICs because instead of repaying principal and interest in foreign currency, they will be using these monies for budgetary purposes to spend on education health, climate change and improving other social indicators.