Huzaima Bukhari & Dr. Ikramul Haq
After seven decades of independence, the rulers in Pakistan want to celebrate liberation from colonial rule having pushed the country into a chronic debt trap at the hands of neo-colonial forces. This paradox depicts what Zulfikar Ali Bhutto highlighted in his book, Myth of Independence. What makes the situation more painful is the fact that every time a new loan is obtained, our rulers express jubilation as if a worthwhile goal has been achieved. The clearance of last tranche from International Monetary Fund (IMF) on August 5, 2016 was portrayed as an auspicious occasion by our Finance Minister—deserving commemoration like August 14, 1947. Our worthy Finance Minister appeared the happiest person on this earth on securing $102 million. This indeed is the worst possible manifestation of a subjugated mind—tragically the nation is forced to remain incarcerated in the debt prison.
Decades of economic dependence has made Pakistan a weak and vulnerable State—though rulers keep on harping the mantra of having nukes and an unparallel ‘strategic location’. On concluding talks with IMF, the government proudly announced: “this is the first time we have successfully completed the programme in 15 years and the sixth in its 58-year relationship with IMF.”
According to the Federal Finance Minister, in June 2013 when PML(N) took over, public debt was Rs. 14318.4 billion, external public debt of $48.13 billion and domestic public debt of Rs. 9521.9 billion. During July 2013 to December 2015, the total public debt increased to Rs. 18467.3 billion out of which external public debt was $53.36 billion and domestic public debt Rs. 12878.1 billion—showing a net increase of Rs. 4148.9 billion, inclusive of $5.23 billion of external debt. At the ‘National Debt Conference’, arranged by the Policy Research Institute of Market Economy (PRIME)—an independent think tank—in December 2015, independent economists warned that our external debt would grow to a whopping $90 billion in the next four years requiring $20 billion a year just to meet external financing requirements. Dr. Hafiz Pasha said that by 2018-19 amortisation payments would double to $8.3 billion. He further estimated that the current account deficit, the gap between external payments and receipts, would exponentially widen to 4% of the total size of the economy. “By 2018-19, the debt-to-revenue ratio will be over 750%,” said Dr. Pasha.
Sakib Sherani, former Principal Economic Advisor to Ministry of Finance, alleged that the government was playing with debt numbers. He said the debt-to-GDP ratio has become irrelevant in case of Pakistan as the country lacks the capacity to repay the debt even at its current 65% level of debt-to-GDP ratio. “In case of Pakistan, the debt-to-revenue ratio is more relevant. 350% would be the limit, beyond which it wouldn’t be sustainable. Currently, this ratio stands at an alarming 523%,” said Mr. Sakib Sherani.
It is an undisputed fact that external debt servicing remains the main concern in the wake of unprecedented rise in the volume of foreign loans since 2008. The real challenge on this front will come in the year of maturity of 10-year Eurobonds ($500 million in 2006) and ($750 million in 2007). Repayment of rescheduled Paris Club debt under Official Development Assistance will also start from FY 2017, while servicing the Extended Fund Facility Programme with the IMF will begin in fiscal year 2018. The five-year Eurobond issued in April 2014 of $1 billion would mature in FY 2019. It is obvious that debt obligations starting from 2016 would create extraordinary pressure on foreign exchange reserves.
Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue (FBR), continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies. Other alarming elements are current account deficit, trade deficit, decline in exports and rising imports.
IMF Agreements (1958-2016)
Since 1958, Pakistan signed 16 programmes with IMF. On December 8, 1958 the military government signed one-year Standby Arrangement (SBA), which it terminated prematurely in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA completed on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly after one year. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ended on November 23, 1983. After a gap of five years, two simultaneous programmes, Structural Adjustment Facility (SAF) and SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively. The ninth programme, again a one-year SBA, was signed on September 16, 1993 but was terminated prematurely on February 22, 1994. The 10th programme comprised two separate facilities—SAF and EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th programme was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000. Under the 13th programme, another SBA was signed on November 29, 2000 and continued until September 30, 2001. The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The latest programme with the IMF was signed in September 2013 and was successfully completed.
According to IMF, Pakistan requires at least US$12 billion during 2016-17—the bulk of this will go towards returning foreign loans. The government requires US$3 billion to meet the current account deficit. It needs further US$ 5 billion to retire medium and long-term loans. Another US$ 4 billion to pay back loans acquired from other creditors like the World Bank and Asian Development Bank (ADB). Faced with this challenge, there is no firm resolve or plan to foster fiscal discipline. No strategy has been devised to reduce increasing debt burden. Resultantly, borrowings from banks are increasing to meet current expenditures and pay off liabilities of the ailing Public Sector Enterprises (PSEs).
The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure rule of law, and stop reckless borrowing and ruthless spending.
Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. To end economic apartheid, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.
Our foreign debt, as predicted by independent economists is going to swell to US$90 billion in a few years and that of domestic debt to Rs. 15 trillion if curative measures and tough decisions are not taken in time. The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth, if continued, will push the country towards complete disaster. The unabated indulgence of rulers in wasteful expenditure—when half of the population of the country is facing malnutrition—is simply criminal. True independence requires self-reliance for which fundamental reforms are inevitable. All citizens should be entitled to equal opportunities, benefits of public spending and economic growth.
The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).