The Maturity of Debts and Governments

Author Name: Dr Usman W Chohan      28 Aug 2019    

The looming fears of an economic recession in Pakistan and a difficult negotiation process with the International Monetary Fund are drawing increased public and media attention to the debt and deficit position of the country. Judging from recent figures and from a wider consensus of estimates, Pakistan’s ability to borrow and to repay are coming under increased stress.

In its annual headlining report Fiscal Monitor, the IMF has projected that Pakistan’s public debt-to-GDP ratio might exceed 84% of gross domestic product (GDP) by 2023, which is 12 percentage points higher than the 72% level left by the previous PML-N government. It projects a 77% public debt-to-GDP ratio at the end of the current fiscal year and 79.1% by the following year. With respect to the fiscal rules that Pakistan has set for itself under the Fiscal Responsibility and Debt Limitation Act, Pakistan’s debt should not be more than 60% of GDP.

This has turned into a thorny issue for political wrangling in both parliamentary debates and TV talk shows, but this tends to detract from a longer-term perspective on Pakistan’s profile of indebtedness. I believe it helps to take a step back and consider the debt problem of emerging markets more broadly, before looking at our debt repayment schedule in a more dispassionate manner, so as not to confound the long-term nature of indebtedness with the short-termism of government tenure.

Looking at the schedule of Pakistan’s debt, one should observe that a significant portion of the debt that is maturing now was incurred as far back as the Musharraf years (early 2000s). Pointing the finger at the current government belies the fact that borrowings from past liabilities are the chickens that now come to roost, and that borrowings undertaken now will need to be shouldered by public institutions of thenext generation, up to and even exceeding the next two decades.

When we speak of dissuading governments from reliance on external borrowing, we are really doing so with our future generations in mind; and when we lament our current fiscal state, we are in fact acknowledging the lack of remedial action in the past. But this time-sensitivity is lost in the political to-and-fro that blurs lines between the long-term nature of sovereign burdens and the short-termism of governments that seek to “backload” the costs to subsequent governments rather than shoulder the pain in the immediate term.

To put it another way, the problem is more broadly one of the different time horizons (maturities) of political institutions versus government liabilities. Sovereign borrowings occur on 10-year or 20-year horizons, while the governments over the past 40 years would have considered themselves lucky to even approach the end of a full five-year term. Time inconsistency leads to problems of expediency in shoring up the short-term balance sheet rather than in biting the bitter pill of long-term structural reform.

As such, governments (around the world, not just in Pakistan) tend to prefer “kicking the can” down the road, until there areno more cans left to kick. The ballooning of emerging market debts is in part a reflection of the phenomenon identified above.

It is not the specific number that matters, but rather the subjacent policy credibility that has remained wanting regardless of the government in power. That credibility deficit is in fact the greatest deficit Pakistan faces – and one that is much more searing than the current account deficit that has perennially characterized our economic situation.

This is in part a structural problem of producing less of what the world needs than purchasing more of what the world offers, but it is also attributable to the institutional tensions that excess politicization in the past has wrought upon the manner in which business is conducted in the country.

As an example, various governments have put tacit if not overt pressure on the independence of central banks, and this has left a bitter legacy on the nation’s monetary and fiscal discipline. Similarly, the odious nature of at least a portion of borrowings incurred in the name of the country has meant that little of what has been taken has been channeled towards the appropriate objectives.

Prudent debt management is an essential component in macroeconomic stability and economic growth. When a country’s economy is growing at 3%, as ours is now, but its population is also growing at 3%, then per capita income growth is zero. What the current government will have to borrow to bridge the balance sheet gap shall mature years from now, and the burden it is facing is the product of the choices of earlier regimes which are now coming due.

The keyword in both debt management and governance, in my judgment, is maturity. Maturity in governance requires a long-term approach that balances the expediencies of the present with the challenges of the future. Maturity in debt management means that short-term financing needs must consider the time-inconsistency of taking from the savings of future generations to fuel consumption in the present. In either case, what the country requires is a longer-term orientation that emphasizes above all greater “maturity.”

The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at

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