THE total stock of domestic debt and liabilities of the government that stood at Rs17 trillion in June 2018 swelled to Rs21.2tr in June 2019. It rose to Rs23.5tr at the end of April this year, according to the State Bank of Pakistan (SBP).

This voluminous addition of Rs6.5tr in the domestic debt stock is quite alarming. As volumes of the debt grow, so does the cost of servicing. When a large part of government revenue is devoured by domestic debt servicing alone, very little is left to meet other expenditures, including those on national defence and social sector. That forces the government to borrow more just to service old debts, thus running the vicious cycle of borrowing and debt servicing forever.

It was largely because of the build-up in domestic debt that the PTI government had to spend 31.3 per cent of the total current expenditures on domestic debt servicing in 2019-20. For the current fiscal year, government spending will be even larger — 33.5pc of the total budget expenses. Can Pakistan afford to reduce its domestic debt borrowing or at least begin the process anytime soon? In 20-21, it would be next to impossible given that the economic slowdown (0.4pc growth in 2019-20) cannot be easily reversed and the government may not achieve the economic growth target of 2pc it has set for the year.

Governments in Pakistan have learned to live comfortably in the domestic debt trap at the cost of 220 million people. Fiscal responsibility law exists but no government has ever been tried and punished for breaching the law. So that does not matter anymore.

Under the PTI government, the tenor of domestic debt has shifted from short term to long term. This means future governments will be in trouble when long-term bonds mature in a few years

What does matter is that the government of the day has to balance fiscal account books keeping three facts in mind: the national defence cannot be compromised and some high-sounding developmental and social safety programmes need to be rolled out, more for avoiding the erosion in political account rather than for ensuring sustainable progress or helping the needy.

A third head of expenses that has to be met at all costs is, of course, the day-to-day running of the government with an army of ministers, state ministers, advisers and special assistants to the prime minister and a large, inefficient bureaucracy. That is why budget makers spend full energy every year on allocating resources for these three heads of government expenses. And if that means more has to be borrowed from banks or non-bank sources, so be it. That keeps the stock of domestic debt mounting.

Domestic debt increases more rapidly when, for any reason, the government of the day fails to mobilise external financing. But in case of the current government, we see that external and domestic debts have risen side by side: the PTI says that happened because it inherited big volumes of both external and domestic debt. But the opposition parties and independent analysts attribute it to the PTI’s poor economic management.

In the accumulation of domestic debt under the PTI government, one thing stands out: a visible shift in the debt tenor from short term to long term. This means that future governments will find themselves in problem when long-term bonds mature after some years. Investment in long-term Pakistan Investment Bonds (PIBs) that stood at just Rs3.4tr in June 2018 shot up to Rs10.9tr in June 2019 and then to Rs12.4tr in April 2020, according to SBP statistics. Against this, the investment in short-term market treasury bills (MTBs) that was around Rs5.3tr in June 2018 went down to Rs4.9tr in June 2019, but shot up again to Rs5.7tr in April 2020.

Another important thing is the composition of floating debt as part of the total domestic debt that sometimes leads to an abrupt increase or decrease in the total debt. MTBs for the replenishment of cash, according to the SBP’s definition, reflect provincial borrowings from banks for commodity operations. Since commodity operations are seasonal, a huge amount of investment made in these MTBs stands retired within a year, thus bringing the stock of domestic debt down when commodity operations are less intense. At the end of April 2020, only Rs285bn worth of debt was shown under this head as part of the total domestic debt.

To have a better idea of domestic debt management under any government, it is advisable to focus more on such debts obtained through ordinary MTBs. By the end of June 2020, the domestic debt raised through ordinary MTBs is expected to rise beyond its end of April 2020 level of Rs5.7tr as the government continued auctioning these bills in May-June on a net basis.

Non-bank domestic debt is qualitatively better than bank debt because it does not crowd out the private sector. Sadly, it constitutes a very small percentage of the total domestic debt and liabilities of the government. To reverse this trend, promoting National Savings Schemes (NSS) and discouraging institutional investors from investing in them are good ideas. But promoting NSS with an increase in yields is not advisable except in cases of those schemes that are exclusively meant for widows or senior citizens. Even if institutional investment in NSS is banned, as is the case right now, unusually higher returns on them make it difficult for banks to mobilise term deposits especially at a time when the real interest rate is negative.

Published in Dawn, The Business and Finance Weekly, July 13th, 2020