Dealing with “debtocracy”

Huzaima Bukhari & Dr Ikramul Haq

Total debt servicing increased by around 57 percent during FY 2018-19 compared with last fiscal year6 which was driven by higher domestic interest payments (on account of rise in domestic interest rates) while external debt repayments increased significantly and recorded at Rs 974 billion during FY 2018-19 compared with Rs 450 billion during last fiscal year. The interest servicing grew by around 39 percent during FY 2018-19 compared with last fiscal year mainly due to increased borrowing on account of higher than budgeted fiscal deficit, increase in domestic interest rates as well as depreciation of Pak Rupee against main international currencies also contributed towards this rise—Fiscal Policy Statement 2019-20, issued by Debt Policy Coordination Office of Ministry of Finance

Public debt as percentage of GDP was recorded at 84.8 percent at end June 2019 compared with 72.1 percent at end June 2018. This increase was primarily due to the build-up of liquidity buffers and higher exchange rate depreciation—Debt Policy Statement 2019-20, Debt Policy Coordination Office, Ministry of Finance.

Lower revenue collection and sharp rise in current expenditures caused a deterioration in fiscal indicators during FY 2018-19 i.e. the government registered a primary deficit of 3.4 percent of GDP and an overall deficit of 8.9 percent of GDP, against its revised target of 1.8 percent and 7.2 percent, respectively. Similarly, revenue deficit also witnessed significant increase and was recorded at 5.6 percent of GDP compared with its revised target of 3.8 percent of GDP—Fiscal Policy Statement 2019-20, issued by Debt Policy Coordination Office of Ministry of Finance

All indicators show that our successive governments, including the incumbent one, due to imprudent economic and tax policies, have pushed Pakistan into chronic, unremitting, unceasing debt-enslavement. Debtocracy, a term yet to become part of public discourse, is not merely an economic issue. It has multi-faceted political connotations. Once a nation is trapped in the ‘debt prison’, its natural consequence is political subjugation. The exploitative Neo-Colonial powers through lenders like International Monetary Fund (IMF) and others, make the enslaved and subjugated to obey their commands and follow agenda set by them. Pakistan is a classic study of being victim of debtocracy leading to economic and political subjugation. This economic bondage is a modern form of slavery having devastating effects. The subjugated/slaves live in a permanent state of submission, pain, suffering and subordination. In the capitalist world, the ‘debt-slavery-syndrome’ represents a perpetual despair and never-ending suffering for both individuals and nations.

Economists mention debts and liabilities only in numbers e.g. Pakistan’s public debt has touched the dangerous level of 84.4% of GDP. Of course, numbers are important, but more vital is discussion on all aspects of debtocracy—a new form of slavery that needs to be exposed and countered. Unless we get rid of it through self-reliance and by exploiting our indigenous natural and human resources, our economic miseries will not end. The fundamental question that needs to be debated is: why in the name of people, our elites have been recklessly borrowing money and paying huge amounts in debt servicing, which is now three times of the amount we spend on defence!

History of subjugation and resistance in various parts of the world presents vital lessons for humanity. Debt shackles cannot be broken without waging resistance against elites and the oppressors. India under the British Raj was ruthlessly plundered—see details in ‘An Era of Darkness: The British Empire in India’ by Shashi Tharoor and ‘Class Structure of Pakistan’ by Dr. Taimur Rahman. One needs to recall ‘Salt March’, also called Dandi March or Salt Satyagraha, the historic nonviolent protest led by Gandhi in March–April 1930. The march was the first act in an even-larger campaign of later civil disobedience (satyagraha). Among others, Martin Luther King, Jr. later cited the Salt March as a crucial influence on his own philosophy of civil disobedience. Gandhi, he said, had sent a simple message by grasping a handful of salt on the beach at Dandi, and millions answered his call.

Many years back we wrote: “When the colonial masters imposed salt tax in the Subcontinent, a grand disobedience movement (andolan) was launched and they were forced to withdraw it. In the so-called post-independence period, our rulers and tax managers have proved to be even crueler than the colonial rulers were as they levied tax on salt sold under branded names, knowing that these days majority buys the same and sale of salt in non-packing form is hardly in practice”.

As elsewhere in the world, subjugation and submission before the IMF [many call it New East India Company] has led to oppressive taxes, even on items of daily use by the poorest of poor, like sugar, wheat, flour, pulses etc. What makes the situation more painful is the fact that ‘debtocratic subjugation’ is all-pervasive and has created “learned helplessness”. The people even after monstrous food inflation are showing endurance/submission. There are no mass protests as witnessed in the past in many countries. The Opposition parties being culprit of accumulating debt will never mobilise the masses for non-violent protests on the issue. Debate is only confined to TV talk shows and there too zealous defenders of the present governments—federal and provincial—make every effort to justify it showing “mercy” for the poor by way of charity.

The most loathsome legacy of the five-year term (2013-18) of Pakistan Muslims League (Nawaz) [PMLN] was pushing the nation towards debtocracy. All governments, especially PMLN, borrowed recklessly, imposed harsh tax measures, and devaluing currency. The same path is adopted by the coalition government of Pakistan Tehreek-i-Insaf (PTI). With massive devaluation of currency and high interest rate by the State Bank of Pakistan (SBP), foreign/local liabilities have increased manifold.

The government of PMLN took all kinds of steps, from introduction of cash margin to imposition of heavy regulatory duties on imports, but failed to curtail the current account and trade deficit. The trade deficit hit US$ 33.9 billion as imports increased to US$ 55.2 billion during July 2017 to May 2018. Even 14% devaluation of the rupee in December 2017 onwards could not help in reducing the import bill.

The unelected ex-Finance Minister, Miftah Ismail, on May 14, 2018 told the National Assembly that borrowing of Rs. 22 trillion would be necessary for 2018-19 for payment of domestic/foreign debts/debt servicing. Thus for the newly elected government, the deadly debt trap was already laid by PMLN. Due to thoughtless policies of the economic wizard of PMLN, Muhammad Ishaq Dar, presently suspended senator and proclaimed offender, the country’s external debt and liabilities reached US$ 98.16 billion by the end of February 28, 2018. The position of internal debts was equally alarming. According to SBP, it stood at Rs. 26.8 trillion as on May 1, 2018. It was Rs. 22.5 trillion as on June 30, 2017.

The consequences of the economic mess created by PMLN were obvious: more borrowing and taxes by the new government of PTI after elections of 2018, going to IMF once again, so-called austerity measure leading to retarded growth, high inflation affecting fixed income earners and the poor. Further debts, more squeezing of fiscal space—enormous debt-servicing exceeding Rs. 3000 billion and deepening of deadly debt trap, that is, to borrow just to pay back interest on old debts.

Historically, our rulers, military and civilian alike, have been seeking bailouts from IMF—many call these death-blows. With every loan came harsh conditions—ostensibly meant for economic revival/reforms leaving us in deeper quagmire. Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality huge loans were secured for reforming (sic) the tax, banking and justice systems—just to mention a few. Fresh loans were negotiated with renewed enthusiasm by all the successive governments, including that of Pakistan People’s Party (PPP) and now after PMLN, by the PTI, which before coming to power used to claim that it would make Pakistan self-reliant and never seek any IMF’s bailout.

Dr. Abdul Hafeez Shaikh, now a favourite of Prime Minister Imran Khan, as Economic Minister of PPP signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 and got disbursements of about $7.6 billion. He failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful end on September 30, 2011. Now as PTI economic wizard, he has secured bailout from IMF of US$ 6 billion. A few days back under his ministry, Debt Policy Statement 2019-20 is finally released after a gap of 18 months. It needs to be prepared every year to fulfill the requirement of section 7 of the Fiscal Responsibility and Debt Limitation Act 2005 [“the Act”]. It presents many disturbing and worrisome facts about debtocracy. The successive governments not only breached the limit of 60% provided in the Act but also conceded vulnerabilities on many fronts—especially the continuous shortfall in revenue targets and phenomenal increase in current expenditures.

According to the Debt Policy Statement 2019-20, total public debt as on June 30, 2019 was recorded at Rs. 32,708 billion showing an increase of Rs. 7,755 billion during fiscal year [FY] 2018-19—out of which Rs 3,635 billion (47%) was borrowed for meeting the federal budget deficit, Rs. 3,061 billion (39%) was due to currency depreciation; Rs. 927 billion (12%) was offset by higher cash balances necessary for effective cash management as the government was committed to zero borrowing from SBP in future, Rs. 132 billion (2%) was difference between the face value (which is used for recording of debt) and the realized value (which is recorded as budgetary receipt) of Pakistan Investment Bonds issued during the year.

Debt Policy Statement 2019-20 further reveals that “during FY 2018-19, public debt servicing was recorded at Rs. 3,065 billion against the annual budgeted estimate of Rs 2,396 billion. Total debt servicing increased by around 57% during FY 2018-19 compared with last fiscal year which was driven by higher domestic interest payments (on account of rise in domestic interest rates) while external debt repayments increased significantly and recorded at Rs. 974 billion FY 2018-19 compared with Rs 450 billion during last fiscal year.” According to the Policy Statement, the healthy is that “during first half of FY 2019-20, investment in  12-months Treasury Bills (T-bills) and 3 to 10 years Government Bonds increased”—share of 3-months T-bills in total T-bills portfolio “reduced to around 29% percent at end December 2019 compared with around 100% percent at end June 2019”.

The responsibility of the fiasco on debt front, pointed out in Debt Policy Statement 2019-20 does not mainly lie with the PTI Government. In fact, PMLN pushed Pakistan to horrific debt-enslavement committing blatant violation of section 3(b) of the Act: “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, the PMLN Government increased it by 27%.  

During the decade of democracy [2008-2018], the Opposition parties also showed apathy by not raising a voice on the issue of gross violation of the Act. None of the Opposition parties announced a shadow cabinet or prepared a White Paper on the issue. It was their duty to create public awareness about the deadly consequences of rising debt burden and increase in debt servicing as the largest expenditure in the budget. Not a single Opposition party unveiled its own plans/strategies to meet the requirements mentioned in the Act.

The claim by the PTI Government that it was unaware of chronic situation on internal and external debt front on assumption of power in 2018 is a lame excuse as on May 14, 2018 in his budget speech, PMLN’s ‘selected’ Finance Minister told the National Assembly about the huge quantum of funds required to meet external obligations. No doubt, the start of term for the PTI was with exceptional debt burden, but despite knowing it well, they had no definitive plan to deal with it and unnecessarily delayed the deal with IMF.

The latest figures of total debt and liabilities at the end of first quarter of the current fiscal year of Rs. 41,489.5 billion, available at the website of SBP, present an alarming situation. The main challenge is, however, how to handle it. The Debt Policy Statement 2019-20 in conclusion says:

“Going forward, following are the main priorities with respect to public debt management over the medium term:

• Government objective is to bring and maintain its Public Debt-to-GDP and Debt Service-to-Revenue ratios to sustainable levels through a combination of greater revenue mobilization, rationalization of current expenditure and efficient/productive utilization of debt.
• For domestic debt market development, the government is planning to introduce various new instruments with the objective to meet government financing requirements at the lowest possible cost while providing additional avenue to investor in-line with their investment horizon and risk appetite/preference.
• Government intends to broaden the universe of Shariah compliant securities (domestic as well as international).
• Lengthening of maturity profile of domestic debt through enhanced mobilization from medium to long-term government securities will remain priority to reduce the re-financing and interest rate risks of domestic debt portfolio.
• Government will continue to seek long-term concessional loans for development purposes”.

It is an admitted fact that prior to PTI Government, all economic managers, during the military and civilian rules alike, have been borrowing recklessly and spending ruthlessly. Unfortunately, there persists massive wastage of funds on huge perks/perquisites/benefits to the privileged classes. The mundane reality of today’s Pakistan is that elites—militro-judicial-civil complex, businessmen-turned-politicians and absentee landowners—are very affluent, but the Government is poor, requiring loans even to pay its employees’ salaries and other day-to-day expenses. This area is not even touched by the PTI Government as Debt Policy Statement 2019-20 concludes” as under:

“Government is also taking necessary steps for ensuring fiscal discipline and consolidation, stabilizing the economy and accelerating growth. Accordingly, the government has started revamping the economy through structural reforms and stabilization measures such as broadening the tax base, reforming the Public Sector Enterprises (PSEs) and reducing the fiscal deficit, while ensuring that social safety net and development spending are not only protected but enhanced considerably. All these measures are expected to bring stability leading to gradual reduction in the fiscal deficit over next few years and subsequently would reduce the country’s reliance on additional debt”. 

The key to debt retirement is export-driven growth, creating exportable surplus, and import-substitution through rapid industralisation with joint venture with foreign companies, collection of taxes fairly and drastic reduction in wasteful expenses. For achieving these goals, no concrete plans based on pragmatic and sound research are available with PTI Government! So far, there are only clichés as contained in Debt Policy Statement 2018-19 and daily public pronouncements. There is a desire to make 2020 year of prosperity, but it cannot be done unless elitist structures are dismantled for which the PTI has no inclination. Like its predecessors, the PTI also believes in patchwork here and there that will never cure the system. The outrageous debt burden and huge fiscal and current account deficits are symptoms of illness of system. These symptoms will keep on recurring unless the causes for illness are cured. The removal of causes of illness (elitist economic structure, heavy unproductive expenses, non-tapping of natural and human resources and ending crony capitalism) needs will as well as concrete agenda. These are not available with the PTI Government, at least Debt Policy Statement 2018-19  clearly testifies to it. 

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are member Adjunct Faculty of Lahore University of Management Sciences (LUMS).