Breaking deadly debt trap

Dr Ikramul Haq

The most dreadful aspect of the five-year term (2013-18) of Pakistan Muslims League (Nawaz)—[PMLN] was leaving behind a monstrous public debt touching the level of 71% of the GDP—unprecedented in our economic history. The Opposition parties failed to raise an effective voice in Parliament on the issue of violation of section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005 [“the Act’]. Under parliamentary democracy, Opposition announces a shadow cabinet, prepares White Papers on the vital issue, exposes wrong policies of the government and presents its plans and strategies, but this never happens in Pakistan.

Debt accumulation without plans to pay off was the worst one could expect from any responsible government but PMLN was taking pride in it! It was also in utter violation of section 3 of the Act that required: “beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product”. Instead of reducing and/or containing public debt at 60% of GDP, PMLN increased it by 10%. IMF and others were not raising alarms and self-acclaimed experts of PMLN were making tall claims of making Pakistan Asian Tiger by 2025 and member of G-20 by 2020!    

It is a fact that the Opposition parties were not properly addressing the matter of PMLN’s gross violation of the Act even though the country was on the brink of economic collapse. The unelected Finance Minister, Miftah Ismail, on May 14, 2018 presented before National Assembly demand of record borrowing of Rs. 22 trillion in the coming fiscal year for retiring domestic and foreign debts and for debt servicing. In a report [To servicing maturing debt, Pakistan to borrow Rs. 22 trillion in 2018-19], it was aptly highlighted that:

“ The interest payments on domestic and foreign loans would consume roughly 31% or Rs1.62 trillion of the proposed budget of Rs 5.247 trillion of the next fiscal year….As against Rs13.16 trillion borrowing in the outgoing fiscal year, the finance minister sought the National Assembly’s approval for Rs 21.912 trillion as borrowing for repayment of domestic debt in the next fiscal year. The amount is 60.5% or nearly Rs 8 trillion higher than the outgoing fiscal year. This will expose the government to exploitation by commercial banks, which have already started dictating their terms due to mounting financing needs”.

It is strange that in the presence of above facts, the wizards of Pakistan Tahreek-i-Insaf (PTI) did not prepare any viable plan to meet the economic challenges on being elected. The result was utter confusion and uncertainty on assumption of power. Having no option, the PTI Government ultimately bowed before the International Monetary Fund (IMF) to avoid default in paying external liabilities.  

Our total debt and liabilities have risen to Rs. 35.1 trillion or 91.2% of the size of our economy. Total debt and liabilities include debt of public sector enterprises (PSEs), non-governmental external debt and inter-company external debt from direct investors abroad. The direct responsibility of Government is of Rs. 28.6 trillion but indirectly it is responsible for most of the remaining debt as guarantees were given by the Finance Ministry and due to involvement of State Bank of Pakistan (SBP) in these borrowings. According to statistics released by SBP, in the first nine months of the current fiscal year, there was a net addition of Rs. 5.2 trillion in the total debt and liabilities, showing 17.4% growth over the debt level of June 2018.  As of March 31, 2019, our external debt and liabilities surged to $ 105.8 billion. The first nine months of current fiscal year registered a net addition of $ 10.6 billion in the total external debt and liabilities with a growth rate of 11.1%.     

No doubt that for the PTI coalition Government the start of term (2018-23) was with exceptional debt burden, record fiscal and current account deficits, forcing it to more borrowing, new taxes and devaluation of rupee. This was all due to imprudent policies of the economic wizard (sic) of PMLN, Ishaq Dar, now a proclaimed offender. His farcical claims of economic turn-around and record growth rate now stand fully exposed.

Indeed Pakistan is facing the worst ever fiscal, trade and current account deficits and insurmountable debt burden. It needs to be recognised that in the wake of a weakening rupee, debt burden and debt servicing have also risen. The depreciation of one rupee adds to Rs. 105.8 billion to the public debt. Similarly, even increase of just one percent raises the cost of debt servicing roughly by Rs. 180 billion. On May 20, 2019, SBP increased interest rate by 1.5% [now standing at 12.25%] as a precondition to avail IMF’s bailout package of US $ 6 billion—it will enhance debt servicing cost by over Rs. 260 billion. Since December 2017, the SBP allowed the currency to weaken by over 40%, yet exports witnessed negative growth.

The consequences of present economic mess are obvious: more borrowing, high discount rate, weak rupee, slow growth and further taxes—these would adversely affect fixed income earners and the poor. Further borrowing means more squeezing of fiscal space—enormous debt-servicing leading to deadly debt trap that is, borrow just to pay interest of old debts.

It is an admitted fact that our economic managers, during the military and civilian rules alike, have been borrowing recklessly. Borrowing per se is not objectionable, but in our case funds have been abused—wasted on huge perks and perquisites to the privileged classes and not for economic uplift of the country. Today’s Pakistan represents a state where a trio of militro-judicial-civil complex, businessmen-turned-politicians and absentee landlords is very affluent, but the Government is poor, needing loans even to meet day to day expenses. This state of affairs is the direct outcome of the policies of successive governments, promoting rent-seeking, giving a free hand to tax evaders and appeasing plunderers of national wealth.

The challenge is how to break this deadly debt trap. The key is export-driven growth, especially creating exportable surplus by modernizing agriculture and establishing agro-based value-added industries. Only through sustainable growth rate of 6-7% for at least a decade, we can overcome monstrous fiscal deficit and create annual jobs of two million for our youth. We, thus, need radical changes in taxation, namely, reduction in the exorbitant sales tax rate (it should be 8-10% across the board), bringing corporate tax rate to 20%, and introducing equitable tax base, simpler and fairer tax procedures, highlighted in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ [PRIME Institute (April (2016)].

For overcoming despair and negativity, we as a nation must resolve to adopt a path leading to prosperity and self-reliance—it lies in rapid industralisation and accelerated growth. Existing elitist structures are the main impediment to achieve these goals, so we need fundamental reforms in all spheres of governance, discussed in Policies for growth and employment, Daily Times, April 14, 2019. Solutions are available, all we lack is the political will to implement them.

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The author, Advocate Supreme Court, is Adjunct Faculty of Lahore University of Management Sciences (LUMS)