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Here is an interesting method for assessing the sustainability of govt debt. Sustainability of govt debt should depend on the ability of the government to garner enough govt revenues, which is the sum of all govt receipts excluding capital receipts in any year. In this method, debt is expressed as a multiple of govt revenues, and debt becomes unsustainable if the multiple becomes too big or grows too fast.
5-year IMF forecasts are a neat way of taking care of other variables. For example, dynamics of fiscal deficit, GDP growth rates, inflation, currency devaluation, etc will be reflected in predictions for govt debt and govt revenues.
Highlights
1. A sharp fall in govt debt btw 2002 to 2008, and a sharp but short-term boost to govt revenues.
2. The decadal, relentless rise of govt debt as % of GDP, but matched by govt revenue growth.
3. From 2017, govt revenues as % of GDP falls, whilst debt increases sharply.
4. IMF paints a grim picture as debt heads towards 90% of GDP whilst govt revenues are limp.
5. Servicing interest will eat up a big share of govt revenues, cripple development and stymie social projects.
Why is the fiscal response so different in 1998 and now?
1. From 1998 to 2017
Pakistan had a fiscal and currency crisis in the late 1990s. This would have caused external debt to soar and a slowdown to follow. The smaller currency crisis happened in the early 2010s.
From 2005 to 2018, govt debt as % of GDP was following a similar pattern to govt revenues as % of GDP. Whereas debt has risen steadily from lows of 52% to 72%, govt revenues have risen from 13.2% to 15.5% of GDP. It is seen that the very high debt in 2000-2003 (at 77- 82% of GDP), was brought down to 52%, which is only partly explained by a near 4% point spike in govt revenues.
2. From 2017 to 2024 (prediction)
From 2017 to 2019, debt is rising at a faster rate than before 2017. Debt continues to rise in the forecast years to 2024 to reach 85% of GDP (or an 8% point increase in the five years). From 2017 to 2019, revenue has fallen by 0.4% of GDP. It falls by a further 0.4% in the forecast years.
By 2024, debt levels are the highest in over 25 years, but govt revenue is at standstill. The gap between debt and revenue (see chart) is almost as large as in the late 1990s/ early 2000s.
3. Pakistan is incapable of raising Tax to GDP ratio in a short span of years
The country is not tax compliant. There is too much corruption in the elite, so their taxes will simply not increase. Indirect taxes can be raised but a spike in tax rates of any form will create a vicious political backlash.
4. War of Terror in 2001 helped Pakistan through the 1998 debt crisis
It is well known that WOT gave Pakistan various sources of monies, upfront and hidden (eg US & Saudi aid, drug dealing, CIA secret funding). It showed up as a spike in govt revenues and vanished just as fast. Debt as a % of GDP fell like a stone, which can only happen if the fiscal deficit was converted into a fiscal surplus. It follows that normal govt expenditure (incl defence spending) was paid for by other means.
5. There is no easy money now
The geopolitical outlook in 2020 is very different from the turn of the century. Previous alliances have fallen away and monies from those sources have dried up. China, its' only benefactor today, may help, but we know China is not a donor. Besides, China is consistently raising govt debt, and increasing the govt debt to govt revenue ratio.
Data source
