Khyber Pakhtunkhwa’s Debt Management Fund: A Landmark Initiative for Fiscal Sustainability and Economic Stability

By web desk On Oct 7, 2024

As of June 2024, Pakistan’s gross public debt stands at approximately Rs. 71 trillion, which accounts for 67.2% of the country’s GDP. The growing debt burden is a major concern, particularly in light of Rs. 9.7 trillion budgeted for interest payments, which represents over 80% of total projected revenue or 51% of the total budget for FY 2024-25. When measured against total revenue, total Federal government debt are a staggering 584%, underscoring the fiscal challenges.

As of June 2024, KP’s total debt stock stands at Rs. 670 billion. For the current fiscal year, KP’s debt servicing obligations are Rs. 67 billion, accounting for just 3.9% of the total revenue. While the debt stock itself does not pose a major issue, the real challenge lies in the debt flow, the recurring burden of debt servicing, which directly impacts available revenue for other priorities.

To ensure the sustainability of Khyber Pakhtunkhwa’s (KP) debt, the provincial government took two pioneering steps that have yet to be implemented by other provinces.

First, in June 2022, KP government enacted the Fiscal Responsibility and Debt Management Act, marking an important legislative reform. This law, passed by the Provincial Assembly, provides a legal framework to promote fiscal discipline and prudent debt management practices within the province. The legislation is designed to impose clear limits on borrowing, ensure transparency, and maintain fiscal stability by mandating regular reporting on public debt and fiscal performance.

Second, in September 2024, KP government made a groundbreaking move by establishing a Debt Management Fund, the first of its kind in Pakistan. This fund is specifically aimed at managing the province’s debt servicing obligations more efficiently and effectively. The Debt Management Fund serves as a financial tool to centralize and streamline debt-related activities, allowing for better planning and allocation of resources towards servicing existing debt. This proactive approach reduces reliance on ad hoc measures, mitigates the risks of financial shortfalls, and ensures that KP can meet its debt obligations in a structured and sustainable manner.

The establishment of a Debt Management Fund in Khyber Pakhtunkhwa (KP) serves as a strategic financial tool designed to create a buffer against the reliance on costly borrowing for future projects. By building this fund, the KP government aims to accumulate resources that can be used to finance development projects internally, without needing to resort to expensive loans. This will not only reduce the province’s exposure to interest rate volatility and debt servicing costs but also provide greater financial flexibility. Over time, the fund will allow KP to finance high-impact projects in infrastructure, education, health, and other important sectors with less dependence on borrowing, promoting long-term fiscal sustainability.

In addition to supporting development, the Debt Management Fund will also act as a safeguard for the province during times of economic uncertainty. It will be utilized for emergency and contingency planning, ensuring that KP has the financial resources to respond swiftly to crises, such as natural disasters or economic downturns. This aspect of the fund mirrors the function of a sovereign wealth fund, which is used by many governments globally to secure fiscal stability in the face of unforeseen circumstances. By creating a dedicated reserve for emergencies, KP government will not need to rely on expensive short-term borrowing in times of crisis, thereby protecting its fiscal position and ensuring smooth governance during challenging times.

The importance of establishing the Debt Management Fund extends beyond immediate financial relief. It represents a forward-thinking approach to risk management and economic resilience. The fund will enable KP to maintain a more balanced debt profile, reduce its vulnerability to economic shocks, and enhance investor confidence in the province’s financial management capabilities.

These two initiatives, the enactment of the Fiscal Responsibility and Debt Management Act, 2022 and the establishment of Debt Management Fund, set KP apart from other provinces, positioning it as a leader in adopting innovative, responsible debt management practices. These steps not only strengthen fiscal responsibility but also enhance the province’s ability to maintain long-term financial stability amidst increasing debt pressures.

One of the key elements of this strategy is enhancing the province’s ability to mobilize domestic resources by broadening the tax base, improving tax compliance, and exploring new revenue streams. This will include optimizing the collection of provincial taxes, increasing non-tax revenue from state-owned enterprises, and leveraging public-private partnerships (PPP) to fund infrastructure and other development projects without adding to the debt burden.

In addition to increasing revenues, KP government will undertake a thorough review of its budget to reduce non-essential expenditures and redirect those savings towards important areas, such as debt servicing and development. A stronger focus will be placed on eliminating wasteful spending and improving the efficiency of public service delivery. This approach ensures that scarce financial resources are deployed in ways that generate the most value for the province, while also creating fiscal space to strengthen the Debt Management Fund.

In addition to above, Khyber Pakhtunkhwa (KP) government is committed to adopting a more strategic approach to borrowing in the future. Moving forward, KP government will focus exclusively on securing productive loans, those intended for projects that are financially sustainable. This means that the projects funded by these loans will be capable of generating enough revenue to service their own debt, without placing an additional burden on the province’s finances.

Debt Management Fund will invest in secure, risk-free financial instruments that will generate profits and help grow the fund, along with contributions from KP’s resources. The profits earned will be non-tax revenue and can be used to support the social sector in KP.

Additionally, by creating this fund, KP government will have more liquidity at its disposal. This means the government will have more flexibility to meet financial obligations without the need to rely heavily on borrowing or cutting down on essential spending.

As part of the strategy to build and sustain this fund, KP government has committed to allocating at least 5% (or more) of the total provincial debt, which currently stands at PKR 632 billion, to the Debt Management Fund. This allocation will help ensure that the fund grows steadily over time and becomes a reliable tool for managing debt while supporting long-term financial stability for the province.

The KP government firmly believes that debt, in itself, is not inherently problematic. Rather, it is the utilization of debt that determines its value. Borrowing is a useful tool when it is invested in projects that deliver tangible economic benefits. Therefore, the province’s borrowing strategy will prioritize loans for initiatives that contribute to revenue generation, job creation, and economic growth.

Abdul Qayyum Khan – the author of this article serves as the Head of Debt Management Unit for the Government of Khyber Pakhtunkhwa and can be contacted via email at: aqkhan.virgo@gmail.com.