Soaring debt

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The growing problem

The diminution in various avenues of foreign assistance and aid to Pakistan is one of the contributing factors in large-scale increase in the debt-levels of the state. It is a kind of a planned fiscal freeze undertaken by foreign governments that has effectively constrained the generation of money in the country putting enormous debt burden on the executive. The current debt figures paint a scary picture as the government’s debt has soared to Rs.27.6 trillion with a net addition of Rs.3.4 trillion in the eight months since the PTI government took over the reins of government.

The debt has increased with the fast pace of nearly 14% due to low tax revenue, high expenditure and currency depreciation. The currency depreciation has considerably reduced the buying power of the rupee putting additional pressure on the financial resources of the government. It is distressing to observe that the government borrowing has ratcheted up to Rs.14 billion a day as the cost of running administrative chores has mushroomed.

The obvious indigenous cause of the accumulation of debt is ever-increasing gap between revenue and expenditure as the primary governmental revenue earning agency FBR has not been able to enhance collection of revenue. In first nine months of the current fiscal year, the FBR suffered a shortfall of Rs.318 billion in revenue collection. This revenue-expenditure gap has given rise to the demands of revamping FBR and carrying out fundamental alteration in the taxation system of the country with making it more productive. The performance of FBR is ever sluggish and could be measured by the fact that its tax collection grew at a pace of 2.4% in the nine months, which was even lower than the nominal gross domestic product (GDP) growth of nearly 12%.

The financial constraints of the government exacerbate due to high level of debt servicing and defence services as it is estimated that nearly 69% of the entire budgetary allocation is devoted to these two heads leaving precious little to cater to other requirements. The money needed to defray the cost of debt services and defence services is estimated to higher than the total revenue collection of the government and leaves a massive gap in revenue-expenditure equation. Keenly aware of this vital paucity the IMF has proposed to target primary budget balance implying that current expenditures, excluding debt servicing, should not be more than the revenues.

Interest rate woes

The currency depreciation has made the consideration of budget deficit requirements go haywire and it has caused ever-increasing level of debt as it has impacted the overall figures of both revenue and expenditure. Another difficulty is added due to the increase in interest rate under the express conditions considered imperative by the IMF that wants them to go into double figures. The hike in interest rate has resulted in adding the additional burden of Rs.500 billion to the overall cost of debt servicing amounts. The cost of debt servicing in the current fiscal year will be over Rs. 2 trillion after the recent hike in interest rate. There are scant chances of a sharp reduction in debt as a percentage of the GDP and it may take a long time to come down. It is projected that it will remain above the statutory limit of 60% of GDP.

Another aspect of the issue is that the external debt of the government increased 18.42% to Rs.9.23 trillion in first eight months of the current fiscal year. There was a net increase of Rs.1.44 trillion in the external debt and the primary cause is the 33% depreciation the value of the rupee. In June 2018, the value of a dollar was equal to Rs.121.54 which rose to Rs.139.055 by the end of February and it further shed its value and is currently traded at almost Rs.145 to a dollar. The depreciation belies the contentions of the government that the IMF is not behind the anticipatory reduction in the value of Pakistani currency.  It appears that currency traders are not heeding the warnings of the government to restrain from playing with the currency value.

Growing up-and-up

The problem of debt becomes highly gross when viewed in the backdrop that these debt estimates do not include loans of $9.2 billion obtained from China, Saudi Arabia and the United Arab Emirates. Those loans are the responsibility of the central bank but at the end of the day they will be counted as part of the national debt as they are also required to be paid back. The loans disbursed by these countries are a part of the temporary relief and are in no way point out to a long-term solution of the debt-related issues. Like successive governments, the PTI is also struggling to enhance exports despite around 33% depreciation of the rupee. This is the weakest link in the economic scenario of the country and it becomes acute in the light of ever-increasing imports.

The continuous gap in revenue-expenditure axis has constrained the federal government to acquire debts through Market Treasury Bills (MTBs) from commercial banks but the propensity decreased considerably after the financing was shifted towards the State Bank of Pakistan. While the government’s total borrowing through MTBs decreased Rs.1.7 trillion to Rs.3.6 trillion, this aspect of borrowing from SBP rose to Rs.6.9 trillion, a net addition of Rs.3.3 trillion or 92.9%. This shift has also become an issue as the IMF is reportedly asking Pakistan to shrink this debt and retire it as early as possible. TW

Baqar Bilal Hussain is a social activist

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