Piling up public debt to critical level

News & Views

Mohammad Jamil

THE most serious aspect of our dire economic situation is the growing debt that limits the fiscal space to invest in human development and infrastructure. The reason for piling up huge debt is that we spend more than we earn, and we import much more than we export. Against tax and non-tax revenue collection of Rs 3900b the total expenditure is more than Rs 4900 billion, hence fiscal deficit of Rs 1000b. As regards trade balance, our imports are around $43b and exports less than $22b; hence trade deficit of $ 21 billion. After taking into account the $20 billion remittances from Pakistani expatriates, still there is current account deficit of $ 1 billion, which has to be paid out of reserves or by taking foreign loan. Public debt had increased from Rs.800 billion in 1990 to Rs 3000 billion in 1999, while external debt doubled from $20b to $40b in 1999.
There was no increase in external debt and remained static at $39b because of shrewd policy of the then government; but from 2008 to 2013 the external debt increased from $39 to $54b – increase of $16b during PPP’s five-year term. And today it stands at around $ 67b – an addition of $15b during the last three years. Pakistan’s public debt stood at Rs 6.3 trillion in 2008, and today it stands at Rs 17 trillion, which means that public debt has increased around three times in the last eight years and is at critical level. More than one-third of this debt is foreign while the other two-third is domestic. As a result, 60 per cent of total revenues are allocated for debt servicing alone, leaving little for investment in social and economic development.
An analysis of all IMF reports released in the past two years revealed that agency’s latest debt projections for 2015-16 were higher compared to the estimates given in its first report, which was the base for signing the three-year $6.2-billion bailout package in September 2013. The IMF had then projected Pakistan’s external debt would increase to $58.6 billion by 2015-16, but now it is more than $67 billion, which is likely to increase by end of the current fiscal year. This is despite the fact that Pakistan has benefited enormously from declining global crude oil prices, otherwise the situation would have been more dismal. The newly formed Monetary Policy Committee of the State Bank of Pakistan (SBP) decided to keep the benchmark interest rate unchanged for the next two months.
However, SBP Governor Ashraf Wathra had said that Pakistan’s declining exports are reflective of a worldwide phenomenon… Price is a function of production. How will the exports increase if there is no surplus production to begin with?” The question is why Pakistan has not been able to have a favorable balance throughout history of Pakistan, except once during Korean War and second time in 1973 during oil crisis? Anyhow, the government must find ways and means to increase production by ensuring uninterrupted supply of electricity. It means the government should focus on the projects for generation of electricity that reduce the cost of energy. On their part, the trade and industry should resort to innovative marketing policies; look for non-traditional markets; and try to increase the exports of value-added products to overcome the trade deficit. How unfortunate that even remittances of $20 bn by expatriate Pakistan do not help overcome the current account deficit?
It is common knowledge that for higher growth there has to be substantial increase in investment. But the present rate of savings to GDP is around 15 per cent, which is lower if compared with the developing countries and emerging economies of the world. In the region, savings to GDP ratio in India, Nepal and Bhutan and Bangladesh is more that 30 per cent against 15 per cent of Pakistan. Although the government claims that the inflation rate is 2.2 per cent at the present, but during the last six months prices of pulses and other food items have increased from 30 per cent to 50 percent. The problem is that inflation hinders the capacity to save. It was due to the accumulation of debt-mountain that Pakistan had to allocate around more than Rs. 1100 billion for debt-servicing alone.
The threats faced by Pakistan have to be understood in the light of fast changing regional and international situation, which add urgency to revive the economy so that adequate resources could be allocated to defend Pakistan’s integrity and sovereignty. It is painful to note that except proverbial exception almost every government in the past took loans by accepting and complying with harsh IMF conditions. Increase in the rates of utilities produces ‘the multiplier effect’, leading to cost-push inflation making it impossible for the local producers to compete in the world market. But this crisis is of our own making, as corruption has eaten into the vitals of the nation. The government should therefore restructure the public sector enterprises because on the average these state enterprises are causing loss of more than Rs. 500 billion per year.
Almost Rs. 1000 billion per year are lost due to wastages, mismanagement and corruption. If the government feels that it cannot make public sector enterprises profitable, then it should privatize them through transparent mechanism. Last but not the least; imports should be rationalized so that foreign exchange is not wasted on non-essential imports. To avert the economic disaster, the government must show zero-tolerance to corruption, tax evasion, wastages and mismanagement in public sector enterprises. It should learn to live within its means and reduce the non-development expenditure by curtailing perks and privileges of cabinet members and parliamentarians. In the past, in a quest to balance the budget or to keep the fiscal deficit within reasonable limits, the axe always fell on development expenditure. If it happens, Pakistan would not be able to build infrastructure for further development and industrialization to generate employment opportunities.
—The writer is a senior journalist based in Lahore.

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