When Pakistan Tehreek-e-Insaf (PTI) assumed power in 2018, the government’s internal debt was approximately 16,400 billion rupees, of which 40% was long-term debt. Long-term loans typically have a maturity of 3 to 30 years. Keep in mind that the interest rate on such loans is fixed at the time of issuance and remains the same until the maturity of the loan. This rate is linked to the policy rate at the time the loan is taken.
After assuming power, the PTI government increased the interest rate sharply, raising it from 6% to 13.25%. This made all new loans very expensive. At the same time, the government began converting short-term loans into long-term loans. By September 2018, the proportion of long-term debt in government debt was 40%, but by June 2019, this proportion had increased to 80%.
Almost all of the loans that the PTI government acquired in 2019 were long-term, with a maturity of 3 to 30 years. These loans were taken at a time when the interest rate was very high. Under the normal circumstances, this interest rate will remain in place until the maturity of the loan. That means the interest rate for the future government was also decided by the PTI government. When the PTI left the government, the domestic debt had increased from 16,000 billion rupees to about 28,000 billion, of which 81% was long-term debt. A large part of this was taken at a 13% interest rate, which will remain in place until the maturity of the loan.
In April 2022, the PDM government assumed power and continued to increase the interest rate, up to 22%. This government also prioritized long-term loans, which further increased the amount spent on interest, and a large part of the budget began to be used for interest payments. This interest rate has already been determined for the next many years, which will continue to put additional pressure on future budgets.
After May 2024, the policy rate was reduced by 4.5%, which made new loans taken in recent months cheaper, but there will be no reduction in the interest rate on long-term loans that were taken during the period of high interest rates, and the interest rate determined at the time of obtaining the loan will remain in place until the stipulated maturity of the loan. The inflation rate has now fallen to 6%, and there is a decline in the interest rate. But despite this, the high interest payable on long term loans under the current conditions will remain a burden on the national economy. For a healthy economy, it is extremely necessary to reduce this burden and the way to reduce this burden is the debt restructuring.
Debt restructuring means changing the terms of existing loans so that the loans can be repaid easily. One form of this could be a reduction in the interest rate on long-term loans. Now that the inflation rate has fallen to 69%, long-term loans acquired at a 20% interest rate are certainly a big burden. To reduce this burden, it is necessary to negotiate with the lending banks and convince them to reduce the interest rate on long-term loans. All domestic government loans are under sovereign guarantee, which means that the government has to make payments according to the stipulated terms. But in exceptional circumstances like Pakistan, banks can be persuaded to soften the terms for the sake of public welfare.
The government faced a similar situation in the case of Independent Power Producers (IPPs). The government was bound to make payments to IPPs according to the stipulated terms until the stipulated period, but in view of public demands and difficulties, the government requested IPP owners and a large number of IPPs showed leniency. Similarly, commercial banks can be persuaded to reduce the interest rate on long-term loans.
Pakistan currently has long-term debt of over 35,000 billion rupees. If the interest rate on this is reduced by just 1%, the government can save more than 350 billion rupees annually. This is such a large amount that 10 projects like the Multan or Lahore Metro Bus can be completed with this. Alternatively, another welfare program like the Benazir Income Support Program can be started, or 500,000 unemployed people can be given salaries for a whole year.
Debt restructuring can provide significant relief to Pakistan’s fragile economy. Even a small reduction in the interest rate can provide the government with significant resources that can be used for development projects, social welfare programs, and job creation. At present, there is a need for the government to negotiate with commercial banks and persuade them not to keep the interest rate on long or short-term loans above core inflation + 2%. If the government succeeds in enforcing this demand, it can save more than 3,000 billion rupees annually.
In the context of the current economic challenges facing Pakistan, debt restructuring is not just a financial strategy but an economic necessity. The burden of high interest rates on long-term debt is putting pressure on the government’s finances and diverting resources from essential development and welfare projects. If the government succeeds in reducing the interest rate, these resources can be directly invested in public welfare projects.
Debt restructuring is necessary for the long-term financial stability and development of Pakistan’s economy. If this is not done, the country will face further difficulties under the burden of heavy interest payments, and the resources available for development work and public welfare will be limited. The government should immediately engage in serious negotiations with commercial banks to reduce the interest rate on loans.
