Covid-19 pandemic: Pakistan racks up over $10 billion in new debt (AfDB)
ISLAMABAD: Pakistan has racked up more than $10 billion in new debt during the pandemic, according to the Asian Development Bank (ADB).
The bank in its latest report, “COVID-19 and potential for economic recovery in the CAREC region,” said Pakistan’s debt-to-GDP ratio was the highest in the region at 86% in 2019 and has risen further to reach 88% in 2020.
To cope with financial constraints during COVID-19, CAREC countries required larger-scale budgetary resources.
Governments have provided tax packages to individuals and businesses to combat the economic shocks caused by Covid-19, he added.
The report notes that in the baseline scenario, the Bank assumes: (i) the primary balance is close to zero and (ii) the historical real interest rate is 2.7%. Based on these assumptions, the Bank projects the debt-to-GDP ratio to 2030. The ratio drops from 86% to 64% in 2030 if the government smoothly maintains the primary balance close to zero.
A sustainable level of indebtedness will be reached if GDP growth is higher than 4.5% per year and if the real interest rate does not exceed the historical value of the real interest rate.
The debt sustainability analysis for the CAREC region indicates that the overall risk of debt distress of Pakistan, Afghanistan and Tajikistan is high, while the overall risk of debt distress of the Kyrgyz Republic is moderate and that of the ‘Uzbekistan is weak, according to the latest information. .
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Over the past decade, Pakistan, the PRC, Tajikistan and the Kyrgyz Republic recorded negative values for both the average historical primary balance and the overall fiscal balance. To manage the fiscal imbalance, governments massively accumulated debt, which had repercussions on the financial markets.
A high budget deficit affects the distribution of resources between the private and public sectors. In Pakistan, government borrowing from banks accounts for more than 90% of total lending, the report notes.
This reduces private sector resources and creates an obstacle to private sector development. CAREC savings also spend on low-return public sector projects and unwarranted subsidies such as those on food, fertilizer and the oil sector. This requires a large share of government spending and results in budget deficits.
Pakistan has the third highest debt service at $15 billion, or almost 7% of the CAREC region’s total in 2020.
All other countries except Mongolia had debt service below $5 billion in 2020.
Among the CAREC countries, Pakistan is one of the members that has experienced a current account deficit leading to IMF lending programs in the recent past. Pakistan’s debt-to-GDP ratio rose from 67% to 86% between 2017 and 2019.
The report notes that pandemic loans (February 2020-August 2021) were obtained by all CAREC countries, mainly Pakistan (24%), Uzbekistan (23%), PRC (20%) and Kazakhstan (13%). The volume of pandemic loans was particularly high from April to August 2020. Almost all of these loans (90%) were granted to governments.
The report notes that the direct health costs of Covid-19 are highest in Pakistan (about $2,019 million) and Kazakhstan (about $900 million).
In the long term, more investment in the health sector is needed to ensure the availability of the required immunization infrastructure at the micro level.
The simulation results show that the People’s Republic of China and Pakistan benefit the most from regional and global trade as the trade balance of the former increases by around $118 billion and the trade balance of the latter by around $4 billion. . Reducing tariffs in these countries will provide a trade boost in the region, as the cost of doing business will decrease. These tariff rates can be reduced by at least 5% for CAREC countries during the pandemic and can be brought back to their original levels if necessary after obtaining the necessary impetus for trade.
Copyright Business Recorder, 2022