Pakistan is struggling with the formidable challenge of refinancing and servicing its debts. The country is confronted with a harsh reality: its poor credit rating dims the prospects of accessing the international debt market. A recent report by Moody's Investor Service underscored Pakistan's precarious fiscal predicament, citing its dismal "ca" fiscal rating attributed to a staggering debt burden and feeble debt affordability. With Pakistan's total public debt soaring to Rs67.3 trillion ($239 billion) by the end of 2023, comprising a substantial 74.8% of the GDP, urgent measures are imperative to avert a full-blown crisis. Speaking with WealthPK, Aamir Nazir Gondal, an additional secretary of finance at the Ministry of Finance, emphasised the significant imbalance between government revenue and expenditures. “This imbalance is largely worsened by the excessively high-interest payments on debts, constituting a notable 8% of the GDP.”

“Against the backdrop of escalating debt servicing costs, exacerbated by soaring interest rates and currency devaluation, Pakistan's fiscal strategy appears increasingly unsustainable. The burden of surcharges and levies on essential commodities has further fuelled inflation, which currently stands at a staggering 23%,” he noted. He further said that despite a commendable 29.5% surge in net federal revenues in the first half of FY24, the government finds itself shackled by insurmountable debt obligations. “The exponential rise in borrowings, coupled with a persistent failure to expand the tax base, paints a bleak fiscal landscape.” Dr Muhammad Afzal, an economic adviser at the Ministry of Planning, Development, and Special Initiatives, told WealthPK that the primary issue contributing to Pakistan's fiscal challenges lies in its excessive domestic debt portfolio, primarily composed of floating-rate bonds susceptible to fluctuations in interest rates.

He pointed out that the banking sector, a significant player, has garnered considerable profits from the government's high-yield securities, further widening wealth gaps and exacerbating economic inequalities. In light of Moody's recent upgrade of Pakistan's banking sector outlook from 'negative' to 'stable', coupled with the sector's vigorous profitability, calls for a comprehensive evaluation of domestic debt restructuring has gained momentum. While daunting, such measures offer a viable pathway to alleviate debt servicing costs and foster fiscal resilience. Pakistan must embark on a strategic debt restructuring journey to mitigate financial risks, bolster investor confidence, and pave the way for sustainable economic growth. Failure to act decisively risks plunging the nation into deeper fiscal turmoil.

Credit: Independent News Pakistan