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Overcoming debt enslavement

Huzaima Bukhari & Dr Ikramul Haq

The central government’s debt increased at a double-digit pace to Rs. 32.1 trillion by the end of November [2019], an addition of a whopping Rs. 5.7 trillion in just one year, as the Pakistan Tehreek-e-Insaf (PTI) government failed to adequately enhance revenues to meet expendituresShahbaz Rana, Public debt rises to Rs. 32.1tr by Nov end, The Express News, January 9, 2020

The alarming figure of monstrous increase in national debt during the tenure of PTI Government quoted above by a newspaper’s reporter is taken ‘debt bulletin’, issued by the State Bank of Pakistan (SBP) on January 8, 2020. The reasons assigned are failure to adequately increase revenues to meet expenditure. The perpetual disappointment with efforts to enhance revenues—both tax and non-tax—was discussed in detail in many previous columns as well as unprecedented rise in wasteful expenditure was pointed out in fiscal review of 2019. The new development on expenditure front that went unnoticed was reported by the same journalist on December 30, 2019 [PTI govt okays Rs. 11 billion for military allowances] that the government on December 29, 2019 approved a supplementary budget of Rs11.7 billion to pay for the military’s allowances and allowed duty-free import of cotton to meet local requirements.

It is strange and shocking that the country needs export-led growth to come out of debt prison, especially huge external loans and liabilities that reached the figure of Rs. 10.598 trillion as on November 3, 2019 as per SBP data. On the hand, the Federal Board of Revenue [FBR] is allegedly blocking refunds of exporters and we have huge shortage of cotton bails [around 5 million] “the ECC decided to withdraw the 3% regulatory duty, 2% additional customs duty and 5% sales tax on imported cotton from January 15, 2020”. Local 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-bases 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 to export it for better price and establish units to manufacture juices in world-class packing to earn foreign exchange.      

Blaming FBR to raise more revenue needs reconsideration. They says that shortfall of Rs. 287 billion after downward revision of full year target from Rs. 5503 billion to Rs. 5283 billion in the first six months of the current fiscal year is largely due to loss of revenue of around Rs. 330 billion due to $6 billion worth of import compression in the same period. For this fall in imports, the economic managers are happy to say that they had achieved remarkable, rather extraordinary improvement in trade deficit narrowed over 30% to $11.6 billion! The less imports results in less revenue to the FBR and slowing down of economy is another factor due to this contraction—it is a vicious circle in which we are caught! According to figures released by Pakistan Bureau of Statistics (PBS) on January 6, 2020, exports posted a negative growth both on a yearly and monthly basis, pulling the cumulative growth in exports in July-December 2019 down to just 3.2%.

According to a Press report, “exports again fell to $2 billion a month after briefly remaining slightly above $2 billion—a threshold that Pakistan had not been able to cross on a consistent basis”. It means that the PTI Government is going to miss the annual export target for the second year as well. It is expected that the current account deficit is going to narrow down further that will roughly have impact of further shortfall of nearly around Rs. 350 billion for FBR! The dilemma is obvious—under the programme of International Monetary Fund (IMF), the Government of PTI will remain in deep debt trap due to rising gap between resource mobilization and ever-expanding expense, bulk of which is totally avoidable as it funds a huge government machinery that is inefficient, change-resistant and hooked on unprecedented perks and perquisites!!

Are our economic managers, proud and much appreciated team of Premier Imran Khan, thinking out of box to come out of ‘debt prison’? The answer is big NO. The Finance Ministry, according to a report, released “the last report on debt management risk indicators in June 2018. The next reports are due for the period of December 2018 and June 2019. However, no report has been launched for the past one and a half years”. Is this show their (non)seriousness with the biggest challenge faced by country that this year will incur expenditure of over Rs. 3000 billion in debt servicing against the budget allocation of Rs. 2891 billion?

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, saying good-bye to IMF and becoming self-reliant through a well-thought-for 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 six 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!

Prime Minister, Imran Khan since taking the oath of office and after maiden address to the nation on August 19, 2018 keep on rightly pointing out the most dreadful aspect of the five-year term (2013-18) of Pakistan Muslims League (Nawaz) [PMLN] leaving behind a monstrous public debt of Rs. 29.9 as on August 15, 2018. SBP’s data showed that from 2013-18 total debt and liabilities increased from Rs. 13.5 trillion or 82.8%—unprecedented in the economic history of Pakistan. But now the PTI Government has broken this record even its first year—the logic is simple that we are borrowing to pay off old liabilities! But the question is where the debt retirement plan/strategy of PTI that it used to propagate with much pompous and pride before coming to power?  

Pushing Pakistan to horrific debt-enslavement on the part of 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 economic wizard 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?    

During the decade of democracy [2008-2018], the Opposition parties also showed complete apathy as none of them raised a voice in Parliament or in public gatherings on the issue of blatant violation of Fiscal Responsibility and Public Debt Limitation Act, 2005. None of the Opposition parties announced a shadow cabinet to prepare and make public White Paper on the issue. It was their duty of  Opposition, which was “friendly”, but PTI also did to create public awareness about the deadly consequences of economic policies of PMLN, unveil their own plans/strategies to meet the requirements mentioned in section 3(c)/(d) of the Fiscal Responsibility and Public Debt Limitation Act, 2005.

The Parliament as a whole never addressed the issue of gross violation of the Fiscal Responsibility and Public Debt Limitation Act, 2005. On May 14, 2018, the then un-elected Finance Minister, Miftah Ismail, presented a record sanction for  borrowing of Rs. 22 trillion in the coming fiscal year for retiring domestic and foreign debts and for debt servicing—details are available in a report [To servicing maturing debt, Pakistan to borrow Rs. 22 trillion in 2018-19. The PTI now cannot take a plea that it was caught unawares!!

Of course, the start of term (2018-23) by the coalition government of PTI was with exceptional debt burden, but its subjugation before the foreign lenders to father pushed us into debt quagmire is also inexcusable when the claims were to get rid of it.  

The consequences of present debt burden are obvious: out of the Rs. 5.7-trillion increase in central government’s debt, Rs. 3.7 trillion or nearly two-thirds was on account of budget deficit financing, said the Ministry of Finance in response to the SBP’s debt report. The central bank is also under increasing pressure to cut its policy rate, which is currently 5.75% higher than the core inflation of 7.5%. This has significantly increased the cost of debt servicing, which is now projected at Rs3.2 trillion for the current fiscal year or 60% of the Federal Board of Revenue’s (FBR) revised target. We will have to witness more borrowing and taxes by the new government. More taxes will not only retard growth but also adversely affect fixed income earners and the poor. More loans will be taken to bridge fiscal and current account deficits and pay old loans.

It is an admitted fact that our economic managers, during the military and civilian rules alike, have been borrowing recklessly and wasting the funds collected as taxes or otherwise. What made the situation more painful was abuse of funds—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 sitting in houses of parliament, is very affluent, but the Government is poor, needing loans even to pay its employees’ salaries and other day to day expenses. This state of affairs is the direct outcome of the policies of successive governments, giving a free hand to tax evaders and plunderers of national wealth.

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, utilisation of State land, like GORs etc, for commercial purpose by giving them on lease through public auction, and collection of taxes fairly and justly, but firmly, without any favour or fear. The real tax potential is Rs. 8 trillion. For achieving these goals no concrete plans based on pragmatic and sound research are available with PTI! So far, there is only a desire on the part of PTI to revive the economy, but how this is to be done is still the missing link. From rhetoric to reality will be the real challenge in the coming days for the PTI’s economic team. The outrageous debt burden and huge fiscal and current account deficits are symptoms of an ailing economy. The symptoms will keep on recurring unless the causes for illness are diagnosed and cured. The removal of causes of illness (elitist economic structure and crony capitalism) is a specialised job for which no preparation has yet been made by the PTI Government.


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

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