Huzaima Bukhari and Dr Ikramul Haq

Economic indicators are always open to interpretation and debate. Some analyse these numbers objectively whereas others fall prey to their biases—Mohammad Ishaq Dar, Federal Finance Minister.

The Finance Minister of Pakistan in his Pakistan’s debt: putting the record straight [appeared in many English dailies on February 1, 2017], has vehemently criticized some analysts [without naming them], who according to him are doing “disservice to nation” by gathering and presenting “only selective information, and analyse it on the basis of their preconceived notions”. He said: “What they do not realise is that by misinterpreting the facts and figures of extremely important indicators, they are doing a disservice to the country. They fail to realise that their analysis based on selective data may dampen confidence of both the domestic investors as well as external partners”.

The allegations levelled by the Finance Minister are serious, though in the nature of rhetoric rather than meaningful dialogue. The worthy Finance Minister should call these analysts, engage them in productive dialogue, and persuade them with facts and figures to desist from what he calls “disservice to nation”. Many analysts and economists, notably Dr Hafeez Pasha, Shahid H. Kardar, Dr Ashfaque Ahmad Khan and Sakib Sherani, have been raising their voice against rising debt and its consequences. speaking on Aaj TV programme, ‘Paisa Bolta Hai’, on January 30, 2017, Dr Pasha criticized the government of “violating the Fiscal Responsibility and Debt Limitation (FRDL) Act by extending sovereign guarantees and contingent liabilities of over 3 percent of GDP against the limit of 2 percent fixed in the Act”.  It appears this statement irked the Finance Minister and he chose to defend his position through an op-ed in newspapers. In routine, the Ministry of Finance has been doing this job by frequently issuing “rejoinders.”

While using harsh words for his critics, Ishaq Dar in his write-up is appreciative of international organisations, the World Bank, the IMF and Asian Development Bank (ADB), and credit rating agencies [without naming them], for “objective” (sic) analyses and assessments. He proudly explains: “The vision of our government is not just to bring the debt-to-GDP ratio in line with existing statutory limit of 60 percent, but also to scale down this limit to 50 percent in 15 years, starting from FY 2018-19. Side by side, we have also put statutory upper limit of 4 percent on federal fiscal deficit”. This means he is certain to rule Pakistan for the next 15 years at least!

Addressing noted economists, Ishaq Dar in his write-up says: “there is a need to have a clear distinction between domestic and external components of public debt, since each category carries a different risk profile”. This was never contested by any analyst critical of his policies. The worthy Finance Minister revealed: “As at end June 2016, the country’s gross public debt was Rs19.68 trillion and net public debt stock was Rs17.83 trillion, of which the net domestic component was Rs11.78 trillion and the external component was Rs. 6.05 trillion. Thus, net domestic debt constituted around 66% of net public debt, while the remaining 34% was external debt”.

Dr Hafeez Pasha in his interview on January 30, 2017 showed concern that the government did not appear to be concerned with violating 2 percent of the GDP limit set in FRDL for both rupee and dollar sovereign guarantees and had breached it to reach 2.4 percent (Rs. 800 billion) of GDP in June 2016. He maintained that sovereign guarantees stood at 2.7 percent of the GDP at present against the limit of 2 percent. He referred to two major contingent liabilities—power sector circular debt of Rs. 650 billion and commodity financing of Rs 630 billion. He said: “If all contingent liabilities are included then Pakistan’s total contingent liabilities are Rs 2000 billion and these are not reflected in the budget or public debt. The contingent liabilities would become unsustainable if financial condition of Public Sector Entities (PSEs) is not improved. If PSEs’ financial condition continues to deteriorate then liabilities of the government and the people would increase at a fast pace”.

Dr Pasha further said that sovereign guarantees were increasing at a fast pace after the government began to extend them for energy projects under the China Pakistan Economic Corridor (CPEC) and if contingent liabilities were included then ‘the government had reached the figure of over 3 percent of GDP. He said it was inexplicable why sovereign guarantees were being extended to the private power sector companies under the CPEC.

In his rebuttal, Ishaq Dar specifically mentioned that the entire “amount of debt does not mature on the same day. Rather, it becomes due over a period of time which enables the government to plan its schedule of repaying or rolling over existing debt and go for a new period which is decided taking into account the prevailing cost of borrowing, prospects of rate for coming periods and matching it with tax collection pattern”. He said that “some analysts are often misquoting the level of public external debt in the media as US$ 73 billion. They lump together public debt with private debt, which includes foreign exchange borrowings of banks as well as the non-financial private sector. This represents a cumulative annual growth rate of only 6.3 percent per annum”.

The Finance Minister said that 6.3% percent per annum “cannot be termed an exponential growth, as claimed by a few”. He emphasised that “a part of this increase has come from the IMF debt, which has been taken only for balance-of-payment support, repayment of pending installments due to IMF of loan taken by the previous government in July 2011 and not for budgetary financing”. He highlighted the fact that the present government repaid around US$ 12 billion of external debt till end June 2016, which was mainly related to the borrowings of the previous governments. According to Finance Minister it is an achievement that “despite these heavy repayments, the forex reserves of the country have risen to more than US$ 23 billion, of which SBP reserves were US$ 18.1 billion at end June 2016, which is equal to over five months of import cover as compared to around one month of import cover in June 2013 when the SBP reserves (net of temporary swap of US$ 2 billion) stood at US$ 4 billion”. He said at that time also some analysts were predicting that “Pakistan would not have sufficient external resources to fulfil its external debt obligations and would head towards default by June 2014”.

Contrary to optimism and “under control” scenario painted by the Finance Minister, Hafeez Pasha has warned that “there is real danger of default on account of external debt, which has been increasing rapidly since the last three years and was $74 billion till June 2014. Another $4 billion dollars has been added during the last six months with a possibility of another $4 billion in the remaining six months of the current fiscal year. The only way to avert default on external debt is growth in export and foreign direct investment inflows”. Dr Pasha expressed optimism that export incentive package would help increase exports. 

Whatever worthy Finance Minister may say about his extraordinary achievements (sic) on economic front, the fact remains that that debt burden of Pakistan, internal and external, during the last 10 years has increased at an alarming rate—courtesy fiscal mismanagement, incompetence and sheer callousness of the rulers. Addressing at the National Debt Conference organised by Policy Research Institute of Market Economy (PRIME), in Islamabad on November 12, 2016, Dr. Ashfaque Hassan Khan, former Director General Debt Office Ministry of Finance, said that Pakistan was rapidly heading towards serious debt trap “as the country’s external debt is projected to swell up to $110 billion till 2020, posing threatening situation having no option but to go back to the IMF to avoid default”.

Dr Ashfaque said that due to low level of exports, “Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable”. He projected that the country would consume 40% of its export earnings just to service the external debt by 2020. By 2019-20, Dr. Ashfaque said that amortization payments would increase to $10 billion and “to fill the current account deficit the country will require another $12.5 billion a year, increasing Pakistan’s total external financing requirements to $22.5 billion”. He said that the current account “deficit will be widened due to import of machinery and plants for CPEC projects. After exhausting all available resources including CPEC financing, foreign investment and traditional donors, there will be still $11 billion financing gap, which the country would not be able to meet without the IMF help”.

Dr Ashfaque predicted that Pakistan would return to the IMF in fiscal year 2018-19—the year when the country’s external debt would be $98 billion and its financing gap swelling to $9 billion. Dr. Ashfaque said: “the governments of the PML-N and PPP added $49 billion to total $73 billion external debt. The majority of this amount $32.6 billion was added from 2008 to 2016 while the remaining amount of $17.4 billion was added during the 1990s decade”. According to Shahid H. Kardar, former Governor State Bank of Pakistan, the main concern is commercial borrowings are 25% of the external debt. He says the low returns on the country’s foreign currency reserves compared with the borrowings cost is another matter of concern.

The views expressed by Dr Ashfaque and Dr Pasha are not endorsed by many others. According to Dr Ali Kemal, research economist at Pakistan Institute of Development Economics (PIDE), Pakistan can keep its debt at sustainable level by achieving about 6% annual economic growth rate. He is of the view that despite increase in debt levels, “Pakistan is still not Greece”. Governor State Bank of Pakistan also does not agree with the government’s critics that foreign debt is becoming unsustainable. It is high time that the government experts and independent economists should sit together and debate the issue. There should not be dispute on numbers at least. According to Dr Pasha, 2018 will be a crisis year when Pakistan will start making repayments including that of the Chinese commercial loan. It is true that trade deficit has increased, imports have doubled, exports have fallen to the level of home remittances and under these circumstances, things would further aggravate because the debt relief given by the international agencies will be ending in 2018. The State Bank governor recently told Reuters that he was unaware as to how much of the projected $46 billion inflow for the China-Pakistan Economic Corridor was debt, equity and in kind. His comment was also corroborated by the Director General of the Debt Office at National Debt Conference.

Sakib Sherani in his op-ed, misperceptions about public debt, Dawn, April 1, 2016, noted:

“In a recent article on public debt management, the finance minister has made some dangerously wrong assertions. Foremost of these is that the power projects under CPEC are being set up by private investors; hence the approximately $25 billion foreign debt that these projects will entail will not be sovereign in nature, and by implication, repayment of these loans will somehow not burden the country’s balance of payments. This is patently false. If the finance minister has been led to believe this, it raises even more concern about how prepared Pakistan will be to meet its repayment obligations in the medium term. But first, in order to anchor the discussion, it is important to provide the context of the finance minister’s article and earlier statement on the floor of the Senate. The outstanding stock of debt of any country is composed of those loans that have to be repaid in foreign currency (external debt) and those that are to be repaid in local currency (domestic debt). (Technically, the distinction between external and domestic debt is not made on the basis of currency of repayment but on the jurisdiction of the lender. However, for purposes of simplicity, I will use currency of repayment as the basis for categorisation”.

According to latest data [Pakistan’s Debt and Liabilities-Summary] released by the State Bank of Pakistan (SBP), total debts/liabilities as on June 30, 2016 reached Rs. 22.459 billion as against Rs. 19.846 billion as on June 30, 2015, showing monstrous increase of Rs. 2.61 trillion pushing debt-to-GDP ratio to 75.9%. It confirms beyond any doubt that the country is gradually being pushed in a deeper and deeper debt trap. Within one year (30 June 2015 to 30 June 2016), there was an increase of 13.2% in debts/liabilities. According to a Press report [Pakistan’s debt pile soars to Rs22.5tr, The Express Tribune, August 31, 2016], “the external debt grew to Rs. 7.27 trillion at a faster pace than the domestic debt, although both components registered double-digit growth. This was an addition of Rs. 1.1 trillion in a single year on the back of 16.3% growth”. The report adds:

“The government claims its external debt is Rs 5.4 trillion, although it raises serious questions about the government’s definition of debt calculation.” It is revealed that “in terms of the US dollar, the total external debt and liabilities have increased to $73 billion—a net addition of $7.83 billion in a single year”.

Bifurcation of all debts and liabilities as on June 30, 2016 shows that total public debt alone was Rs 20 trillion and private debt, only Rs 630.5 billion. Excluding liabilities, the total debt went up to Rs 21.5 trillion by June 30, 2016. The report says that “the increase in external debt is more than the International Monetary Fund (IMF) estimates that had put the figure at $71.87 billion in its last report. The IMF had also estimated that the public debt would rise to 64.3% of GDP by the end of the current fiscal year. The government’s domestic debt also swelled to Rs 13.62 trillion—higher by Rs. 1.43 trillion or 11.7% over the previous year’s level. The debt of public-sector enterprises grew at an alarming pace of 24% and was registered at Rs 568 billion”.

The present government, like its predecessors, has been recklessly borrowing to meet its burgeoning budgetary deficit that exceeded Rs 2.5 trillion in 2015-16. The federal government borrowed Rs 1.4 trillion from domestic banking sector during September-November 2016 alone.

It is worthwhile to mention that in June 2008, the total debt was just Rs 6.1 trillion. It increased to Rs 12.37 trillion as on August 31, 2012—this was exclusive of $7.4 billion payable to IMF that SBP undertook to repay out of its foreign currency reserves. The previous government during its 5-year tenure added around Rs. 6.7 trillion to debt burden—103% increase. This monstrous increase was further accentuated by the present government—the total figure as on June 30, 2016 soared to Rs 22.5 trillion!

How rulers make mockery of the laws made by the Parliament is best exemplified in Debt Policy Coordination Office, established under the Fiscal Responsibility and Debt Limitation Act of 2005. Under this Act it was the duty of the Debt Policy Office to ensure effective management of debt control by formulating a strategy for reducing it. On the contrary, this office chose to remain silent while public debt grew from Rs 6.1 trillion in June 2008 to Rs 22.5 trillion in June 2016—an increase of 250%!

According to the Finance Minister when they took over the government in June 2013, public debt was Rs 14318.4 billion, external public debt of $48.13 billion and domestic public debt of Rs 9521.9 billion. During July 2013 to December 2015, the total public debt increased to Rs 18467.3 billion out of which external public debt was $53.36 billion and domestic public debt was Rs 12878.1 billion—showing an increase of Rs 4148.9 billion, inclusive of $5.23 billion of external debt. 

It is an incontrovertible fact that external debt servicing is the main concern in the wake of unprecedented rise in the volume of foreign loans since 2008—the major chunk comes from IMF. The real challenge on debt front will come in the year of maturity of 10-year Eurobonds issued in FY 2006 ($500 million) and FY 2007 ($750 million) is due in FY 2016 and FY 2017 respectively. Repayment of rescheduled Paris Club debt under Official Development Assistance will also start from FY 2017, while servicing the Extended Fund Facility programme with the IMF will begin in FY 2018—the five-year Eurobond issued in April 2014 of $1 billion would mature in FY 2019. It is thus obvious that debt obligations starting from next fiscal year would create extraordinary pressure on the country’s foreign exchange reserves.

Whatever our worthy Finance Minister, Ishaq Dar, may claim, the fact remains that Pakistan is caught in a deadly debt trap. What a tragedy that the government borrows funds from banks to pay off liabilities of corruption-ridden inefficient public sector enterprises (PSEs)! Dar in his utterances completely ignores or hides the fact that debt obligations in the coming years would create extraordinary pressure on the country’s foreign exchange reserves.

Managing high fiscal deficit (root cause of many economic ills) 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.

Pakistan’s fiscal policy remained under immense pressure owing to perpetual failure of Federal Board of Revenue (FBR) to collect taxes according to the real potential. Failure to harness the real potential is playing havoc with socio-economic fabric of society. Behind the present chaotic situation in Pakistan, among other factors, is an oppressive tax system that is hampering growth and encouraging underground economy. It is shocking that with every passing day more and more people are being pushed below the poverty line whereas the ruling elites—militro-judicial-civil complex— unashamedly waste billions of rupees on their personal comfort and in the name of security.

The government’s unabated borrowing to meet burgeoning budgetary deficit is one of the major weaknesses of economic governance coupled with unchecked wasteful spending on monstrous government machinery and inefficient PSEs. There is no scarcity of resources—as propagated by the rulers to shift blame on others—but issues are related to lack of management on the part of political leadership and bureaucracy. Failure to harness the real potential of Rs. 10 trillion is the main issue—see detail in paper Towards Flat, Low-rate, Broad & Predictable Taxes’, published by Prime Institute, a public policy think tank.

We cannot come out of debt-enslavement unless we restructure our State on the principle enshrined in Article 3 of the Constitution—from each according to his ability, to each according to his work. For this, everyone should be given work and fair reward for that. There should be a complete change in the style of governance—the President, Governors, Prime Minister, Chief Ministers, ministers, parliamentarians, and high-ranking government officials should be paid ‘consolidated pay’ liable to tax like income of an ordinary citizen. Palatial residences occupied by them should be sold or converted into income-yielding assets, and all perquisites of civil servants and public office-holders should be monetized to remove the burden off our country’s broken financial back.

The policy of wastage and non-utilisation of resources, oppressive taxation, riding imports and declining exports, appeasement towards tax evaders, money launderers and plunderers of national wealth, if not discontinued, will push the country to further debt incarceration. The brazen indulgence of rulers and bureaucrats in wasteful expenditure—when half of the population of the country is facing malnutrition—is criminal. There is complete indifference to tackle burgeoning public debt—its rapid accumulation cannot be stalled unless fundamental reforms are undertaken as suggested in Towards Flat, Low-rate, and Broad & Predictable Taxes. (The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)