Elections will occur on Thursday (tomorrow) and the country will have a new government which will replace the current caretakers. Unlike them, this government will be anchored in the National Assembly, in the chosen representatives of the people. However, whereas it will inherit the fruits of the caretakers’ good decisions, it will also inherit the thorns of its harmful actions. One of the problem areas it will inherit will be the debt mountain it leaves behind. State Bank data showed that government borrowing had reached Rs 3.99 trillion for the current financial year by January 19, which was as much as was borrowed in the whole of the previous financial year.
It is unfortunate but true that the money is no longer being borrowed to finance development, but to meet current expenditures. Of those current expenditures, debt servicing looms the largest. In short, the government’s borrowing goes not just to meet current expenditure on its functions. But to pay the cost of previous borrowing. What that means is that the debt stock keeps increasing. Therefore, as has happened, even if the government increases its revenue, it finds itself unable to meet the cost of servicing its debt, with the result that it has to borrow to plag the gap. Remember, this is only domestic debt, so the problem of raising the requisite foreign exchange has not arisen. One of the more harmful effects of this situation is that it drives the private sector out of the credit market. Another problem that has arisen is that the State Bank of Pakistan, following IMF advice, first raised its key policy rate, and then kept it there. This has driven up the cost of borrowing for the government, and has thus increased the burden on the taxpayer. Whenever interest payments fall due, the government borrows money to pay them off, thus converting those payments into debt stock. The catch is that the government thus becomes more indebted than before.
The next government will find itself facing numerous challenges. However, this will be key. Many of those challenges are only solvable by spending money on them.However, that cannot be done if the money in the Treasury has already been earmarked for debt servicing. Rupee-denominated debt is as much of a danger of foreign debt, and will have to be tackled sensibly and without bringing the whole edifice of government crashing down.
