An Analysis of Sustainability of Unfunded Debt and Pensions in Pakistan
Keywords:
Unfunded debt, Fiscal deficit, Domestic debt, Pensioner's benefit accountAbstract
Pensions have become a contentious policy issue in Pakistan, exposing fiscal gaps that have accumulated over many years. The growing reliance on unfunded debt, largely sourced through pension contributions, represents a serious risk that warrants investigation. This study examines domestic debt, the fiscal deficit, and interest rates as potential drivers of growth in unfunded debt and assesses the pension system’s contribution to this trend since 1990. Using the Autoregressive Distributed Lag (ARDL) method, the relationship between unfunded debt and these three potential drivers is tested, while a Vector Error Correction Model (VECM) is used to explain the short-run dynamics of the long-run relationship. A series analysis of the Pensioners’ Benefit Account (PBA) further evaluates the contribution of pension funds to the response variables. The results show no significant short-run relationship between unfunded debt and domestic debt, but significant short-run relationships with the fiscal deficit and interest rates. In the long run, unfunded debt is positively and significantly related to domestic debt and the fiscal deficit, and negatively related to interest rates. Growing public debt, an inability to contain the fiscal deficit, and rising interest rates have become a potent combination driving unwarranted additions to unfunded debt. The PBA analysis reveals a significant and rising contribution of pension funds to unfunded debt. Policymakers should heed the warning signs highlighted by studies such as this one to prevent the situation from worsening to the point at which it becomes irredeemable.
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