The revelation, by Finance Minister’s Adviser Shehzad Khurram, that in 14 months the government has paid off Rs 3.65 trillion of debt early, would be welcome, had it not raised the suspicion that this was meant only so that the government could engage in a fresh bout of borrowing. Also, it fails to address an important part of the national debt problem, foreign debt, and the foreign exchange needed to repay it. Though the government, and the Finance Ministry will try to show that this was the result of extraordinary cleverness, the decline in debt has more to do with interest rates, which have declined from their phishing height of 22 percent, to 10.5 percent. As a result, it has been possible to retire debt, only to contract it again at a lower rate of interest, in a process known as debt switching. Another development has been the increase in the tenure of debt from 2.7 years in Financial year 2024 to the present 4.0 years, which means a reduction in the interest paid out. What this has meant is that Rs 850 billion was saved in the last fiscal year, and it is estimated that Rs 800 billion will be saved in this fiscal.
This means that it will be easier to meet IMF conditionalities, but it does bolster the argument for a further lowering of the interest rate, which would not only be pro-growth, but would enable the government to further improve its finances. However, while rupee-denominated debt has declined to Rs 80 trillion from Rs 80-5 trillion, dollar-denominated debt remains the real problem. There is only one way of retiring that debt early, which is to increase exports and remittances to a point where not only are new loans not needed, but old ones can be serviced. The government has placed its hopes on two unreliable pillars. First, software exports; second, minerals and rare-earths. This is apart from the more time-honoured exports, textiles and agricultural produce. Retiring foreign loans early might a possible pathway to easier debt management, but is not possible without increased exports, because it cannot be accomplished merely by government action. Besides, if the country got out of the debt trap, it would not be as bound to follow lenders’ agendas as it is now.
