Huzaima Bukhari and Dr Ikramul Haq

In response to our article, Debt debate [Business Recorder, February 3, 2017], Debt Policy Co-ordination Office (Finance Division) of the Government of Pakistan made "certain clarifications", published on February 22, 2017. This rejoinder is prepared to put the record straight. The point-wise reply is as below:

1. The claim of reduction of fiscal deficit from 8.2% of GDP in 2013 to 4.6% of GDP in 2016 has already been taken care by Muhammad Sabir ['Federal Budget FY 15: Tale of fiscal stabilisation, Business Recorder, September 17, 2014] and many others. The veracity of figures vis-a-vis overstating revenues and understating expenditure should be checked by Debt Policy Co-ordination Office in the light of the following:

After taking into account the, monetary impact of overestimation in revenues and underestimation in current expenditures of the federal government, this overall budget deficit is likely to reach 7 percent of GDP in 2013-14 and cross 6 percent of GDP in 2014-15-Federal Budget FY 15: Tale of fiscal stabilisation, Muhammad Sabir, Business Recorder, September 17, 2014.

Fiscal performance in 2012-13 replicated the pattern of past years as expenditure outstripped revenue by a wide margin, reflecting the continuation of excessive subsidies and lower tax collection. The fiscal deficit increased to 8 percent against the budgeted target of 4.7 percent of GDP mainly owing to around 19 percent slippages in FBR budgeted tax revenue, under estimation of subsidies and interest payments. The fiscal deficit includes Rs.322 billion on account of settlement of power sector circular debt without which the fiscal deficit is calculated at 6.6%-Fiscal Policy Statement for 2013-14 issued by the Debt Policy Coordination Office of Ministry of Finance.

2. In point 2, it is stated: "The opinion piece states that the government is in violation of the Fiscal Responsibility and Debt Limitation Act, 2005 by extending sovereign guarantee and contingent liabilities of over 3 percent of GDP against the limit of 2 percent fixed in the Act".

While issuing the clarification, the Debt Policy Co-ordination Office did not mention that this was not our opinion. In fact, we quoted Dr. Hafeez Pasha as under:

"Speaking on Aaj TV Programme, 'Paisa Bolta Hai', on January 30, 2017, Dr. Hafeez 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."

In the clarification, Debt Policy Co-ordination Office did not contest the following statement of Dr. Hafeez Pasha quoted by us:

"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".

It would have been better for Public Debt Office to make clarification after taking into account the factual position rather than assigning the above opinion to us. We clearly mentioned in our article that the worthy Federal Finance Minister in his op-ed, Pakistan's debt: putting the record straight [appeared in Business Recorder and many English dailies on February 1, 2017], levelled a serious allegation of "disservice to nation" against some notable economists without naming them which was totally unjustified and uncalled for. He could have avoided these words. Thereafter we quoted the analyses of the "targeted persons" so that public should know the divergent views for better understanding of the ongoing debate on debt and its ramifications for our economy.

Unfortunately, the Debt Policy Co-ordination Office took analyses of Dr. Hafeez Pasha and others as "our statements". At some places it called the analyses quoted by us as naïve. The same attitude as demonstrated by the worthy Finance Minister in his piece of accusing some writers of doing "disservice to nation". This shows an intolerant mindset that is not conducive for any meaningful dialogue and debate. Since Dr. Ashfaque Hassan Khan, Dr. Hafiz A Pasha, Dr. Salman Shah and Sakib Sherani have already taken care of it [Pakistan's debt: response to finance minister, Business Recorder, February 17, 2017], there is no need for us to repeat the same. We hope that Debt Policy Co-ordination Office would make an effort to refute the facts quoted by these writers in response to that was claimed by Ishaq Dar in Pakistan's debt: putting the record straight [Business Recorder, February 1, 2017] rather than just pleasing the political master through routine rebuttal(s).

3. The observation by Public Debt Office that "the opinion piece incorrectly states that there is a danger of default on account of external debt which has been increasing for the last three years and was $74 billion till June 2014. In fact, external public debt was recorded at $51.3 billion as at end June, 2014" also needs reconsideration. We quoted the worthy Finance Minister as under:

"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 per cent per annum".

It is strange that we have been accused by Debt Policy Co-ordination Office of misstating the quantum of external debt whereas, we highlighted the point of view of the worthy Finance Minister!

4. As regards the future projection about external debt, once again the clarification wrongly claims that "opinion piece incorrectly states that country's external debt is projected to swell up to $110 billion till 2020 based on estimation of self-proclaimed debt analysts". Since we quoted somebody's opinion, how we can be blamed for stating "incorrectly".

5. It is alleged in the clarification: "The opinion piece also incorrectly states that Pakistan's external debt to export ratio has been projected at 441.8 percent by 2019-20. In fact, if the writers would have referred IMF Latest Staff Report on Pakistan carefully, they would have a better idea that IMF has projected external debt to export ratio at 243 percent during 2019-20. Similarly, external financing requirement of $22.5 billion by 2019-20 is totally baseless and incorrect especially given the fact that export promotion is one of the top priorities of the government and the government has taken several measures recently to boost exports". Again, we quoted on this:

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".

Is it wrong to quote someone? The Public Debt Office may communicate to Dr. Ashfaque the facts and figures and ask him to reconsider his opinion.

6. It is further claimed by Debt Policy Co-ordination Office that "the opinion piece incorrectly states that commercial borrowings are 25 percent of the external debt. In fact, commercial loans only accounted for 3 percent of external public debt as at end September, 2016. Even if issuance in international capital markets are considered, the share of commercial borrowing (commercial banks & Eurobonds) accounted for 11 percent of external public debt as at end September, 2016".

The exact quote in our article was:

"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 Debt Policy Co-ordination Office should have contradicted the statement of Shahid Kardar that was quoted in Pakistan's external debt likely to swell to $110b in four years [Express Tribune, November 13, 2016]. We quoted the statement and its source. Strangely, it is called "the opinion piece incorrectly states". This expression is used in clarification frequently without acknowledging that in our piece we were just quoting somebody's opinion.

7. The clarification says that we mentioned Pakistan's total debt at Rs 22.5 trillion at end June, 2016 while "deliberately ignoring the components making up this number which are as follows:

* Out of this total, net public debt stood at Rs 17.8 trillion;

* Total external debt and liabilities of the country includes debt of other sectors which by definition are not public debt since the government is not liable to pay these obligations such as private sector debt and bank borrowings etc.;

* The cumulative numbers also include domestic and external debt of PSE's, loan against commodity operations etc.;

* The opinion piece also criticizes the definition of public debt. It is to be noted that the government uses the definition of public debt that is approved by the parliament by amendment in the Fiscal Responsibility and Debt Limitation Act as previously it had not defined public debt explicitly".

It is shocking that Debt Policy Co-ordination Office totally misconstrued what we wrote. We wrote as under:

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 a 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".

We specifically quoted from State Bank's report and a report published in a newspaper. Needless to say that clarification by Debt Policy Co-ordination Office needs reconsideration in the light of what stated above. It should consider the following once again:

"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 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" [Pakistan's debt pile soars to Rs22.5tr, The Express Tribune, August 31, 2016].

8. The clarification disputes various debt numbers presented by us and alleges that these are "mostly are incorrect". This allegation is totally unfounded. We precisely made this statement:

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!

No evidence is produced to contradict the above figures in the clarification. Debt Policy Co-ordination Office should see it own Debt Policy Statements for relevant years from where we have extracted these figures! They will certainly find these in their own database!!

9. The clarification says that "fallacious views" are mentioned in the opinion piece "regarding the state of public debt management in Pakistan". It further added: "The present government has made remarkable and sustained gains in improving the fiscal and debt risk indicators. The opinion piece incorrectly states that external debt servicing is the main concern in the wake of unprecedented rise in the volume of foreign loans since 2008. In fact, there is limited pressure from external debt repayments in the medium term. Projected principal repayments to the IMF against Extended Fund Facility (EFF) are stretched over a longer timeframe, starting at US $0.2 billion in 2018 and rising to US $0.8 billion in 2020, with the final payment due in 2025. An amount of US $0.75 billion due in June 2017 is the only Eurobond maturing until 2019. Repayments for Official Development Assistance from the Paris Club began in 2016, but payments are spread over a 23-year period. In fact as highlighted by the finance minister in his article that net external indebtedness of the country has actually declined/ improved by US $4.5 billion during the last three years thus such notions are totally unfounded".

The clarification deliberately overlooked the following part of our article:

"The views expressed by Dr. Ashfaque and Dr. Hafeez 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. Hafeez, 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".

Debt Policy Coordination Office, established under the Fiscal Responsibility and Debt Limitation Act of 2005 is not performing its duties and Parliament is totally indifferent. 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 within the prescribe limit. 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%! This is what we wrote and we stand by it.

10. The Debt Policy Co-ordination Office in its clarification took great pains to tell us that our "opinion piece quotes various existing publications of self-proclaimed debt analysts against which Ministry of Finance has already published various rebuttals/rejoinders in the past".

One wonders if the government alone has monopoly over knowledge. According to the clarification, all those who express different views are "self-proclaimed" experts. This is highly lamentable attitude. It shows the level of intolerance on the part of government towards healthy and constructive criticism. It is simply unthinkable in any democratic polity. For us it is suffice to say that unless you stop telling lies, we will untiring speak the truth!

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