Ishaq Dar’s reputation as a sound choice for managing the country’s finances is so well established that even the previous government led by the PPP had initially reposed the Finance Ministry to him, before that party and the PML-N had a falling out.
But even Dar appeared daunted by the nation’s current level of indebtedness. Addressing a press conference at the launch of the Pakistan Economic Survey 2012-13, he pointed out that “public debt has grown from less than Rs3 trillion in June 1999 to more than Rs14 trillion by the end of this fiscal.”
While the minister was candid in his response to questions regarding the energy crisis, foreign exchange reserves and rebasing of national accounts; he was much more tight-lipped when probed on “raising the burden on the common man”. Winding up the presser, he also mentioned the government’s intent to “focus on austerity.”
The stress on “adopting fiscal discipline” is easily understood given the context of the ‘Public Debt’ section of the Economic Survey. As a percentage of GDP, this country has seen worse times. Back in 1998-99, public debt as a proportion of GDP stood at 100 percent, compared to the current 62 percent.
But in absolute terms, the rise is staggering. And that’s not all. For starters, there are few if any international lenders left that are willing to continue lending to the country. Even the conservatively worded survey concedes that “the composition of public debt has witnessed major changes with increasing reliance on domestic debt due to non-availability of sufficient funds from external sources.”
When governments take debt, economic managers aim to maintain a balance between foreign and domestic debt to manage solvency on both fronts. As shown in the graph, this balance has gone awry as 65 percent of the public debt is now domestic.
An analysis of domestic debt is only meaningful in context of ability to re-pay. This comparison is even drearier: the revenue deficit (revenue shortfall over current expenditure) “reached Rs497 billion or 2.2 percent of GDP during July-March, 2012-13.” Meanwhile the primary balance (total revenue less non-interest expenditure) is negative to the tune of Rs254 billion in 9MFY13.
“Total public debt servicing below 30 percent of government revenue are generally believed to be within the bounds of sustainability,” states the report, only to lament that “public debt servicing consumed nearly 44 percent of total revenues during July-March, 2012-13.” More than 77 percent of this burden came on account of domestic debt.
To add to the ado, an overwhelming chunk of the rising domestic debt took the form of Treasury bills; short-term debt instruments. The inflationary nature of this mode of financing is evident from the fact that “domestic debt grew by 15 percent” in 9MFY13, as maturing T-bills pushed government to issue new ones through the central bank at an ever-increasing pace.
Much of this money has gone to the domestic banks and other financial institutions in the form of interest payments. So while the value of Pakistanis hard-earned money is depleting, thanks to surging government borrowing, these institutions are lending the people’s money to the government and minting profits off them.
As the private sector is being crowded out of the credit pool, their ability to grow and create economic value is being hampered. Meanwhile the government is simply borrowing to stay afloat and is also not creating economic value through developmental expenditure. So while the dagger of repayments domestic and foreign swings closer; the economy’s ability to pay back its loans or even the interest accrued on them is dwindling.
Little wonder then that former finance minister and veteran economist Hafeez Pasha is among the voices of caution declaring that the economy is already “in a debt trap”.
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DOMESTIC DEBT
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Rs (bn) 2008 2013(P) chg
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Permenant debt of which 617 1,957 1,341
PIB 412 1,118 707
GoP Ijara Sukuk - 459 459
Floating debt of which 1,637 4,776 3,139
T-bills through auction 536 2,912 2,375
Market related T-bills 1,100 1,864 764
Unfunded debt 1,020 2,064 1,043
Total domestic debt 3,275 8,797 5,522
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Source: Economic Survey 2012-13
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