The change in the public debt under this government is due to a correction of the flawed economic policies of the previous regime, especially its overvalued exchange rate and excessive borrowing.
• Interest Expenses: The previous government resorted to short-term debt instruments without maintaining adequate cash buffers, and relied heavily on SBP borrowing. This short-term debt profile has resulted in high interest costs on past debt. The present government has had to pay Rs 5.7 trillion (47% of the increase) as interest on debts borrowed by the previous regimes.
• Currency Devaluation Impact: The previous government artificially maintained the exchange rate of the Rupee much above its market value. A large increase in public debt has resulted from the abrupt exchange rate depreciation, which was inevitable because the overvalued exchange rate triggered a balance of payment crisis. The only alternative was a default on external liabilities, which was obviously not an option. Public debt increased by Rs 3 trillion (25% of the increase) due to this currency devaluation.
• Financing of Primary Deficit: The unjustified tax cuts by the previous government coupled with the impact of subsequent economic slowdown due to the Covid-19 pandemic resulted in higher than estimated primary deficits. Rs 2.5 trillion (21% of the increase) was borrowed for financing of primary deficit during first 29 months of the present government.
• Cash Management: Rs 0.6 trillion (5% of the increase) was on account of increased cash balances of the Government to meet emergency requirements. The present government took the economically sound policy of not borrowing from the SBP and maintaining a cash buffer, which led to a one-off increase in debt. However, this increase in debt was offset by corresponding increase in the government’s liquid cash balances. Furthermore, Rs 0.3 trillion (approx. 2% of the increase) was due to difference between the face value (which is used for recording of debt) and the realized value (which is recorded as budgetary receipt) of government bonds issued during this period.
To conclude, the increase in debt during the tenure of present government occurred mainly during FY19 as an unavoidable consequence of erroneous policies of the previous government. Had the previous government maintained a market-based exchange rate, a sustainable level of current account deficit, adequate cash buffers and a long-term domestic borrowing profile, the present government would not have had to make all these difficult adjustments and public debt burden would have been reduced on the back of fiscal consolidation efforts of the present government supported by aggressive control on expenses and growth in tax and non-tax revenues. However, as most of the major adjustments to fiscal and monetary policies have been made, Debt-to-GDP ratio is projected to decline over the next few years.