Mounting debt burden

Huzaima Bukhari & Dr Ikramul Haq

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, issued by Debt Policy Coordination Office of Ministry of Finance.

The Debt Policy Statement 2019-20, prepared to fulfil the requirement of section 7 of the Fiscal Responsibility and Debt Limitation Act 2005 [“the Act”], presents many disturbing and worrisome facts about our mounting debt burden that is not only breaching the limit of 60% provided in the Act but also showing vulnerabilities on many economic 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. 32708 billion showing an increase of Rs. 7755 billion during fiscal year [FY] 2018-19—out of which Rs 3635 billion (47%) was borrowed for meeting the federal budget deficit, Rs. 3061 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.

It further reveals that “during FY 2018-19, public debt servicing was recorded at Rs. 3065 billion against the annual budgeted estimate of Rs 2396 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.”

During the first half of FY 2019-20, investment in 12-months Treasury Bills (T-bills) and 3 to 10 years Government Bonds are mentioned as healthy signs. Resultantly, share of 3-month T-bills in total T-bills portfolio “reduced to around 29% percent at end December 2019 compared with around 100% 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 present coalition Government of Pakistan Tehreek-i-Insaf (PTI). In fact, pushing Pakistan to horrific debt-enslavement was the worst part of the five-year [2013-18] rule of Pakistan Muslim League (Nawaz)—PMLN. They committed blatant violation of section 3(b) of the Act that required that “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 in Parliament on the issue of gross violation of the Act. None of the Opposition parties announced a shadow cabinet to prepare White Paper on this matter. It was their duty to create public awareness about the deadly consequences of rising debt burden as increase in debt servicing was emerging as the largest expenditure in the budget. Not a single Opposition party unveiled its plans/strategies to meet requirements mentioned in the Act.

At the fag end of its rule, Miftah Ismail of PMLN, while presenting budget on May 14, 2018, clearly mentioned a record borrowing of Rs. 22 trillion in FY 2018-19 for retiring/servicing domestic/foreign debts. In a report [To servicing maturing debt, Pakistan to borrow Rs. 22 trillion in 2018-19], it was highlighted:

“The interest payments on domestic and foreign loans would consume roughly 31% or Rs1.62 trillion of the proposed budget of Rs5.247 trillion of the next fiscal year….As against Rs 13.16 trillion borrowing in the outgoing fiscal year, the finance minister sought the National Assembly’s approval for Rs21.912 trillion as borrowing for repayment of domestic debt in the next fiscal year”.

The claim by PTI Government that it was unaware of the chronic situation on internal and external debt front on assumption of power in 2018 is thus a lame excuse as in budget statement, the quantum was explicitly articulated. No doubt, PTI started its term with an exceptional debt burden, but despite knowing well the challenge ahead, they were not aptly prepared to deal with it.

The latest figures of total public debt (exceeding 32 trillion at end of November 2019), available at the website of State Bank of Pakistan (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 the governments, military and civilian rules alike, have been borrowing recklessly and spending ruthlessly. There was, and still is, 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 to meet other day-to-day expenses. This area is not even touched anywhere in Debt Policy Statement 2019-20 that concludes:

“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, especially through modernizing agriculture and establishing value-added agro-based industries, import substitution through promoting local manufacturing, collection of taxes fairly and above all drastic reduction in wasteful expenses. For achieving these goals, no concrete plan, based on pragmatic and sound research, is available with the PTI Government! So far, there are only clichés as contained abundantly in Debt Policy Statement 2018-19 and daily public pronouncements. The desire to make 2020 a year of prosperity cannot be realized unless elitist structures are dismantled, for which the PTI, like its predecessors, has no inclination.

Actions by the PTI Government so far confirm that it also believes in patchwork here and there rather than all-out reforms—restructuring/reconstructing all the rotten/outdated institutions. The outrageous debt burden and huge fiscal and current account deficits are symptoms. These symptoms will keep on recurring unless the real cause of illness is cured. It requires dismantling of elitist structures and eradicating crony capitalism, which is a daunting task, but indispensible to progress. Unfortunately, for this no agenda is available with the PTI Government, at least nothing to this effect is suggested in the Debt Policy Statement 2018-19.  

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