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Unshackling debt shackles

Huzaima Bukhari & Dr. Ikramul Haq

It is now officially admitted that the coalition Government of Pakistan Tehreek-i-Insaf (PTI) secured over $13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest amount in history. It means that the PTI Government and those who later come into power will keep on borrowing just to repay maturing external debts taken by their predecessors. During the fiscal year 2019-20, Pakistan received gross loans of $13.2 billion from bilateral and multilateral lenders including, the International Monetary Fund (IMF) and commercial creditors.

The burden of ever-increasing national debt during the first two years of the PTI Government was highlighted by the Institute of Policy Reforms (IPR) in its brief report, “Pakistan’s debt and debt servicing is cause for concern” [hereinafter “the IRP Report”]. Long before the IRP report, in these columns, the issue of mounting debt and its repercussions was discussed with suggestions to overcome the same—see Malaise of mounting debt, Business Recorder, July 24, 2020, Dealing with debtocracy, Business Recorder, February 14, 2020 and Overcoming debt burden, Business Recorder, August 27, 2018. Unfortunately, as expected, the PTI Government, like its predecessors, paid no heed to the suggestions.

The IRP Report starts with the fact that “in FY 20 alone, Pakistan added Rs. 4.3 trillion to its total debt and liabilities. This amount is 10.4 % of GDP. In two years, total debt and liabilities have grown by a massive Rs. 14.7 trillion. This shows weak fiscal management as well as inability to stimulate growth in the productive sectors. It also reflects a failure to introduce the necessary reforms in key sectors of energy and power”.

In the above articles, it was suggested that the key to debt retirement was export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of State lands 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 IRP Report has emphasised: “While government often ascribes increase in debt to exchange value changes, the picture is more complex. Domestic debt has grown at an equal pace and external debt has grown in US dollars. The increase in domestic debt is because of weak FBR revenue collection, where attempt to reform may have had the opposite effect of what was intended. High discount rate, with no apparent economic logic, slowed down the economy, and with it tax revenue. Despite increase in power tariff, revenue collection by DISCOs have not improved. Consequently, in addition to government borrowings, PSE debt has increased”.  

It is, however, not highlighted in the IRP report that the PTI Government started its term with exceptional debt burden, record fiscal and current account deficits, forcing it to more borrowing, increasing taxes and devaluating rupee.

The legacy, inherited by the PTI Government, was result of imprudent policies of Ishaq Dar, the so-called wizard of Pakistan Muslim League (Nawaz)—PMLN. Ishaq Dar, now a proclaimed offender and fugitive, pushed Pakistan to horrific debt-enslavement. This was the worst one could expect from any responsible government. The PMLN Government, acted in utter violation of section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005, which says: “beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product”. Under the command of Ishaq Dar, the PMLN Government increased it by 27%.

Since the assumption of power, the PTI Government has been trying its best to undo the ugly and painful legacy of the PMLN and Pakistan Peoples Party (PPP) during the decade of democracy [2008-2018]. It is, however, not understandable as to why blocked refunds of over Rs. 700 billion are not being paid when businesses are struggling to survive due to heavy economic toll of Covid-19 endemic/lockdowns. If the PTI Government wants export-led growth to come out of debt trap, especially huge external loans and liabilities, it must clear all outstanding refunds. The exporters are still facing hardships due to pending refunds and non-clearance of amounts under the FASTER (Fully Automated Sales Tax e-Refund) system after being taken out of zero-tax regime. The Government must pay all the outstanding refunds without further delay and zero-tax regime for exporters should be restored, rather than accumulating debt that Federal Board of Revenue (FBR) would never be in a position to pay due to irrational target fixed on the command of International Monetary Fund (IMF).

The IPR Report mentions that the Pakistan’s external debt and liabilities amounted to $95 billion by June 30, 2018 and the PTI Government increased these to almost $113 billion by June 30, 2020. By June 30, 2020 external debt and liabilities were 45% of GDP. It was 30% of GDP in 2018 and 25% in 2013, according to the IPR Report. The most worrisome aspect, as per the IPR Report, is foreign debt that “is used mostly for balance of payments and budgetary support and there is no way of knowing how it will be paid back”.

In fiscal year 2019-20, debt servicing by federal government was Rs. 2620 billion (domestic Rs. 2313 billion and foreign Rs. 307 billion) against net revenues of Rs. 3278 billion after transfer to the provinces. Debt servicing was 79% of total net revenues of the federal government and 65 % of tax collection of FBR. This is the real dilemma and challenge on the fiscal front faced by Federal Government.

According to a report, quoting data compiled by the Ministry of Economic Affairs, during the last two years, Pakistan secured $29.2 billion in foreign loans that include $26.2 billion by the PTI Government since assuming power in August 2018. Out of this, $19.2 billion was just to repay the maturing external debt and the remaining was added to the “external public and publicly guaranteed debt”. The resultant increase in debt-servicing as repayments contracted as new foreign loans, increased substantially. For the current fiscal year 2020-21, the cost of external debt servicing is estimated at Rs. 315 billion despite the fact that over $300 million temporary moratorium on debt servicing is extended by the G20 countries.

In fiscal year 2018-19, Pakistan borrowed $16 billion, including balance of payments support from Gulf countries, and returned $9.1 billion worth of loans. In fiscal year 2019-20, the gross foreign loans stood at $13.2 billion and repayments amounted to slightly above $10 billion. For the Finance Ministry, the report says, “there was no option but to borrow to repay maturing loans and stabilise foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion”.

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 FBR, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of Public Sector Enterprises (PES) etc. Other alarming elements remained high fiscal deficit, sluggish exports and heavy imports.

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. There is a need to run big PSEs with equity stakes for the poor 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 and by the elites only.

The IPR Report says nothing about huge shortage of cotton and subsidy to sugar mills. The Economic Coordination Committee (ECC) decided to withdraw 3% regulatory duty, 2% additional customs duty and 5% sales tax on imported cotton from January 15, 2020. While, the rich sugar industry owners got subsidy and concession in sales tax, yet prices are skyrocketing, nothing is offered as incentive to farmers to produce quality lint. We could have saved huge foreign exchange on import of cotton that once we used to export after meeting our local needs. We are now even importing wheat and sugar. The farmers need to be trained to adopt modern processes for better yield, their cost of inputs must be reduced along with provision of certified seeds for quality cotton and other products.

The sugar, cotton and wheat crises and their poor handling show where the real problem lies—the stubborn bureaucratic structure, weak political oversight, indecisiveness and lack of understanding of the vital issues. On the one hand, we have failed to meet domestic needs and on the other, no worthwhile efforts are made to create exportable surplus in agricultural and other sectors, like IT to tap the real potential. It is high time that the federal and provincial governments chalk out a national plan for long-overdue second Green Revolution in Pakistan by increasing productivity and quality, reducing costs and establishing agro-based industries capable of meeting local demands and producing value-added exportable surplus. Our emphasis should be on growth, productivity and enhancing exports through diversification and value addition. The IT sector is much ignored and its heavy taxation has proved to be anti-growth as explained in Harmful taxation of IT/telecom sectors, Business Recorder, August 28, 2020.


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

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