Malaise of mounting debt

Huzaima Bukhari & Dr Ikramul Haq

The central government’s debt, excluding its liabilities, increased to Rs. 34.48 trillion by the end of May 2020—Central GovernmentDebt, State Bank of Pakistan (SBP).

In the midst of fighting economic toll of Covid-19 endemic, hitting Pakistan enormously, like many other countries, the alarming figure of monstrous increase in national debt during the tenure of coalition Government of Pakistan Tehreek-i-Insaf (PTI) to Rs. 34.48 trillion by the end of May 2020 (it was Rs. 29.75 trillion on May 31, 2019) with an average of Rs. 14.2 billion per day, largely went unnoticed in media and TV talk show debates. It should have been serious cause for concern for all, after negative growth for the just ended fiscal year 2019-2020 and bleak economic projections for the current fiscal year FY 2020-21).

The figure of Rs. 34.48 trillion does not include liabilities that the government indirectly owes to creditors. Thus, the gross public debt will be much higher when the actual liability would become known for the fiscal year ending June 30, 2020 in the coming monthly report of SBP.

As is clear from comparison, on a year-on-year basis, the federal government’s debt increased by 15.8% or Rs. 4.7 trillion and the reasons among others is also depreciation of the Pak rupee, shortfall of about Rs. 1.5 trillion in tax revenues from the original target fixed in the budget for FY 2019-20 as well as unanticipated expenditures on Covid-19-related relief and other concessionary measures.

According to a Press report, “the budget book of supplementary grants showed that the Covid-19-related spending stood at Rs, 289.4 billion or only 6% of the debt that the Pakistan Tehreek-e-Insaf (PTI) government added from June to May 2019-20”. The report adds that in the just ended fiscal year 2019-20, the rupee started shedding its value further and “its impact will be visible in June figures” that have yet not been released by the SBP at the time of writing this column.

“Cumulatively, the PTI government has so far added over Rs. 10.2 trillion to the public debt since coming to power, an increase of 44% that is alarming for the country. When Imran Khan became prime minister, the central government’s debt was close to Rs. 24.2 trillion. In February last year, the PM vowed to bring the public debt below Rs. 20 trillion”, the Press report adds.

For the fiscal year 2019-20, the International Monetary Fund (IMF) has already revised upward its projection for Pakistan’s public debt and liabilities to 90% of gross domestic product (GDP). The SBP has not yet released debt statistics for the last month of the fiscal year 2019-20 to comment on the veracity of the claim of IMF.

The salient features of the latest debt-related statistics available on the website of SBP till May 31, 2020 are as under:

• total domestic debt increased from Rs. 19.8 trillion in May last year to Rs. 23.5 trillion in May 2020, a net addition of Rs. 3.74 trillion or 18.9%.
• major increase is on account of long-term debt, which increased from Rs. 8 trillion to Rs. 17.5 trillion—120% increase  in just 12 months. It was largely because of the government’s decision to convert its short-term borrowing from the SBP to long-term debt—though it helped to increase the maturity period of debt but at the same time increased the cost of debt servicing.
• short-term domestic debt dropped from Rs. 11.8 trillion in May 2019 to Rs. 6.2 trillion in May 2020 due to the shift of borrowing to long-term instruments showing a reduction of Rs. 5.8 trillion or 48% in the short-term debt.
• the acquirement of debt through the sale of Market Treasury Bills (MTBs) to commercial banks increased from Rs. 4.8 trillion to Rs. 5.8 trillion—an addition of 21%.
• external debt of increased from Rs. 10 trillion to Rs. 11 trillion by the end of May 2020, an addition of Rs. 977 billion or 9.8% in one year. These were not increased at a pace as that of domestic debt because of booking of IMF’s liabilities and hot foreign money. In June 2018, Pakistan’s external public debt stood at Rs. 7.8 trillion.

In the present scenario when the economy is in shambles and efforts for recovery through boosting construction boom are in full swing, reliance should shift from the revenues of the Federal Board of Revenue (FBR) to enhance non-tax receipts by leasing price state land for commercial and industrial growth, especially mega city projects with all kinds of incentives and facilities to private sector. It is strange that on the one hand, the government has failed to get rid of losses in energy sector and those of Public Sector Enterprises (PESs) running into trillions and on the other no relief is given to the businesses in taxes in the Finance Act, 2020 to come out of the massive negative impact of Covid-19 endemic and resultant complete and now partial lockdown. The taxes at import stage and withholding taxes along with advance tax payments should be significantly reduced and in many cases should be abolished as discussed in detail in the two-part series, Finance Act 2020—lacking initiatives and innovations, Business Recorder, July 3 and 10, 2020.

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, imposing new taxes and devaluating rupee. This was all due to imprudent policies of the economic wizard (sic) of Pakistan Muslim League (Nawaz), Ishaq Dar, now a proclaimed offender. His farcical claims of economic turn-around and record growth rate now stand fully exposed.

The PTI Government has undoubtedly made many good efforts to undo the ugly and painful economic legacy of the previous regime. However, it is strange and shocking that when the country needs export-led growth to come out of debt prison, especially huge external loans and liabilities that has reached the figure of Rs. 11 trillion as on May 31, 2020 as per SBP’s latest data, FBR is allegedly still blocking refunds of exporters—see details in Unpaid refunds, Business Recorder, July 17, 2020. These must be released without any further delay and sales tax rate for exporters should be brought back to zero regime rather than accumulating debt that the FBR would never be in a position to pay.  

In 2020, we witnessed huge shortage of cotton bails [around 5 million] and “the ECC decided to withdraw the 3% regulatory duty, 2% additional customs duty and 5% sales tax on imported cotton from January 15, 2020”. What a tragedy that the local farmers have not been given any incentive to produce quality lint so that we can save precious foreign exchange on import of raw material that we are capable of producing for local needs and even export. The farmers are neither trained nor supported to use certified seed to produce quality cotton that once we used to export after meeting the local demand! It shows where the actual problem lies. We have failed to increase exportable surplus in agricultural sector, increase productivity and quality, reduce costs and establish agro-based industries capable of meeting local demands and produce value-added exportable commodities. For example, we have not made any efforts to grow seedless and quality citrus for export at better price and establish units to manufacture juices in world-class packing to earn foreign exchange.      

The never-ending demand of further oppressive and anti-growth taxes by FBR must end now as in the present circumstances emphasis should be on survival, revival and growth of businesses by simplifying taxes, drastic reduction in wasteful expenses and getting rid of losses in all PSEs. We need to reconsider our tax policy and reduce taxes for growth and investment if we want to avoid further deepening of debt trap. The PTI Government must give due weightage to recent studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economyand Growth inclusive tax policy: A reform proposal, quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016).

Our emphasis should be on growth and productivity and enhancing exports through diversification and value addition. These have already been discussed in detail in articles relating to overcoming debt burden—Dealing with debtocracy, Business Recorder, February 14, 2020, Overcoming debt burden, Business Recorder, August 27, 2018, Debtocracy and enslavement, Business Recorder, June 15, 2018 and ‘Debt debate’, Business Recorder, February 28, 2017.

The economic managers of Premier Imran Khan should think out of box to come out of ‘debt prison’. The wizards sitting in Ministry of Finance might have read the news item ‘Greek Saga Ends With the Closing of IMF’s Office in Athens’, published on January 8, 2020 by Bloomberg. Are they considering the same ways and means discussed therein to reduce debt burden, bidding farewell to IMF and becoming self-reliant through a well-thought-of plan [from structural reforms in all areas to import substitution to export-led growth, from reducing wasteful expenses to utilizing untapped resources, from imparting technical know-how to boost SME sector etc] that was discussed seven years back in an article, Learn from Hungarians [Business Recorder, August 16, 2013]. Have they studied the paper [Economy of Debt: Alternatives to Austerity and Neoliberalism in Pakistan by Ammar Rashid, M. Nawfal Saleemi and Aasim Sajjad Akhtar] on which PIDE held a seminar on January 9, 2019. The answer appears to be bigger NO!

Pushing Pakistan to horrific debt-enslavement on the part of Pakistan Muslim League (Nawaz)—PMLN—was the worst one could expect from any responsible government. It was in utter violation of section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005 [“the Act] that says: “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 government of PMLN increased it by 27%.  The so-called economic wizard of PMLN, Ishaq Dar, acted callously and another self-acclaimed development expert, Ahsan Iqbal, heading Planning & Development Ministry, had been claiming to make Pakistan, Asian Tiger by 2025 and member of G-20 by 2020?    

The real challenge is how to break away from this debt-prison. The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, getting rid of PSEs, utilisation of State land, like GORs etc, for commercial purpose by giving them on lease through public auction, and collection of simplified and low-rate taxes fairly and justly, but firmly, without any favour or fear.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).