Dr Ashfaque H Khan
Tuesday, May 28, 2013 - From Print Edition
Five years of misgovernance by the previous regime have not only destroyed the economy of Pakistan and damaged its institutions but also drowned the country under a deluge of debt, which our children and grandchildren will continue to pay for through higher taxation in the future.
Why should we worry about high and rising debt? Because it constitutes a serious threat to economic prosperity for a number of reasons: it acts as a major impediment to growth and hence to employment creation and poverty alleviation. Rising debt also discourages both foreign and domestic investment. Further, it puts pressure on the exchange rate thereby causing sharp depreciation with an attendant rise in public debt and inflation.
The current state of Pakistan’s economy reflects the adverse consequences of rising debt. Public and external debts have grown over the last five years at an unprecedented pace. Public debt (both rupee and dollar components of debt) has increased at an average rate of 21.5 percent per annum in the last five years (2008-2012). It has risen from Rs6 trillion in June 2008 to Rs13.6 trillion by end-March 2013. In other words, the country has added Rs7.6 trillion to public debt in less than five years.
Within public debt, it is the domestic debt that has grown at a faster pace (24.1 percent per annum) than external debt. For Pakistan, the extraordinary surge in domestic debt is more worrisome because it is relatively more expensive. Interest payments at over Rs1.0 trillion in 2012-13 have emerged as the single largest component of budgetary expenditure of which the interest payment on domestic debt accounted for over 90 percent of the total. Persistence of large budget deficit and decline in external flows has forced the government to rely heavily on domestic sources to finance the budgetary gap in recent years.
Within domestic debt, the composition of debt has witnessed considerable changes in the last five years. Medium-to-long term debt has been converted into short-term debt (one year and less) with serious consequences for the government’s debt management.
Today, more than 54 percent of domestic debt (Rs8.8 trillion) is of short maturity, which must be rolled over at least once a year.
Pakistan’s external debt and liabilities (EDL) reached $66 billion by September 2012 from $46 billion in June 2008, but these declined to $61 billion by March 2013 owing to the suspension of external flows on the one hand and continued repayment of external debt on the other. Had it not been for the suspension of the IMF programme in May 2010, Pakistan would have added another $8-9 billion in debt at the minimum. In other words, Pakistan’s EDL would have tipped over the $74-75 billion mark by now.
What are the factors responsible for the unprecedented surge in public debt over the last five years? The most prominent factors include persistence of large fiscal and current account deficits,
sharp depreciation of exchange rate (the Shaukat Tarin phenomenon), and unrestrained borrowing with pride and pleasure. The depreciation of the exchange rate alone has added Rs1500 billion or 18.5 percent to the increase in public debt.
The previous regime will always be remembered for adding more debt in five years than the total accumulation of debt in 60 years.
The role of the former finance advisor has equally been important in drowning the country under debt. The advisor had negotiated a programme with the IMF and borrowed over $11 billion resources from them. He never realised that Pakistan would have to repay such a huge amount to the IMF within a couple of years of the completion of the programme. Perhaps he also never realised the consequences of rising debt and bequeathing a mountain of debt to be serviced by the children of Pakistan for decades to come.
The finance advisor also headed the National Finance Commission (NFC) and came out with an award which has in-built manufacturing defects and has sowed the seeds of a perpetual macroeconomic crisis in the country. The NFC Award encouraged provinces to become fiscally irresponsible, promoting fiscal indiscipline that resulted in large fiscal deficit. Financing of a large fiscal deficit, along with a sharp depreciation of the rupee, contributed to the unprecedented surge in public debt. The sharp depreciation of the rupee also contributed immensely to the build-up of the current circular debt leading to energy crisis and persistence of inflationary pressures.
As a result of the blunder committed by the former finance advisor,
Pakistan is now on the verge of default. In the absence of external flows owing to the suspension of the IMF programme, the SBP has lost over $8 billion in its reserves on account of debt repayment, including the payment to the IMF since July 2011. The reserves have dipped to a dangerously low level and by June 30, 2013 it is likely to reach $3.0-3.5 billion (excluding forward buying of the SBP). In all probability, the contribution of former finance advisor in drowning the country under debt, aggravating the circular debt issue, and sowing the seeds of a perpetual macroeconomic crisis will never be forgotten by the people of Pakistan in general and students of economics in particular.
What needs to be done to reduce the country’s debt burden? First, the new government will have to make credible efforts to bring the budget deficit down to 3.0-3.5 percent of GDP by the end of its tenure. Reduction in budget deficit must come largely from raising tax resources by broadening tax bases, reducing tax rates and strengthening the tax administration. Expenditure rationalisation should be the integral part of deficit reduction exercise. The government will have to take bold decision regarding the PSEs. The sooner they are privatised, the better it is for the economy and debt consolidation.
Second, stability in the exchange rate is vital for reducing the country’s debt burden. Third, economic revival should be an integral part of the debt reduction strategy. Fourth, a vibrant debt office of the Ministry of Finance is absolutely essential for managing the country’s debt. Currently, this office has become totally dysfunctional. Fifth, without removing manufacturing defects of the NFC Award, there can never be fiscal discipline in the country and hence no reduction in debt burden. Finally, the life of the Fiscal Responsibility and Debt Limitation Act 2005 will be over by June 30, 2013. The new government must enact a new law to inject financial discipline in the country.
Every child is born today with a debt of Rs83,000. This unprecedented surge in debt is the road to ruin. Can our political leadership rise to the occasion and consolidate the country’s debt?
The writer is principal and dean at NUST Business School (NBS) Islamabad.
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, he totally remained unable to give and implement any strategy to best manage the available energy resources of Pakistan and minimise load shedding. 
