KARACHI: According to data from the State Bank of Pakistan, the Pakistan debt, which includes both what it owes within the country and to foreign sources, increased by almost a third in the 12 months leading up to August, reaching nearly Rs64 trillion.

This 29 percent increase in debt amounts to Rs14.4 trillion, up from Rs49.57 trillion at the end of August 2022.

Total Pakistan Debt

Of the total, domestic Pakistan debt increased by 23 percent to Rs39.79 trillion, up from Rs32.15 trillion in August 2022, while external debt rose by 39 percent to Rs24.17 trillion, up from Rs17.42 trillion a year ago.

The increase in domestic debt is concerning because it consumes a large portion of the country’s tax revenue, leaving fewer funds available for development and hindering economic growth. A substantial portion of the revenue is now being used to service Pakistan debt (pay off interest and principal), which comes at the expense of economic growth.

In the first two months of fiscal year 2024, central government debt increased by 5.1 percent. Factors such as a high inflation rate of 29 percent and an interest rate of 22 percent over these two months contributed to the rise in domestic debt.

A Senate panel recently informed that the country’s domestic debt has increased by more than Rs7 trillion since January last year primarily due to an increase in the State Bank’s policy rate, which went from less than 10 percent to 22 percent.

A senior official explained that typically, a 1 percent increase in interest rates leads to an additional Rs600 billion in debt.

Regarding external debt, the more significant percentage increase can be attributed to the depreciation of the rupee against the US dollar, making the debt appear larger when converted to rupees.

August witnessed a significant increase in external debt, rising by Rs1.44 trillion, more than double the increase of Rs700 billion a month earlier. On average, external debt increased by Rs563 billion per month between August 2022 and August 2023.

The increase in external debt during July and August reflects the rupee’s devaluation. However, currency experts believe that for external debt to significantly decrease, the trend of the dollar’s devaluation needs to continue.

A country’s ability to manage external debt is often linked to its foreign exchange reserves. However, the State Bank reported a decline in its forex reserves, falling by $21 million to $7.615 billion in the week ending on September 28.

The country’s total foreign exchange reserves amount to $13.03 billion, including $5.42 billion held by commercial banks. In fiscal year 2024, Pakistan needs about $25 billion for debt servicing.

Despite consistent Pakistan debt payments by the government, there hasn’t been a substantial influx of funds since July, when the IMF provided $1.2 billion, and Saudi Arabia and the UAE also contributed. This boosted reserves from $4.46 billion in June to $8.15 billion.

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