EDITORIAL: Prime Minister Imran Khan has repeatedly claimed that the economy's performance has improved significantly and recently cited 424 million dollar July 2020 current account surplus (against the current account deficit of 100 million dollars in June 2020 and 613 million dollars in July 2019) as proof positive of his claim. This newspaper, however, would urge the Prime Minister to look at the very disturbing rising debt figures. The Ministry of Finance citing data released by the State Bank of Pakistan recently noted that debt to Gross Domestic Product (GDP) ratio rose from 86.1 percent in June 2019 to 87.2 percent in June 2020. In actual terms, the government has added 11.3 trillion rupees to the public debt during the two years of its tenure.
The reasons for the rise in the debt to GDP ratio as per the Ministry of Finance are two-fold - both related to conditions agreed between the government's economic team leaders and the International Monetary Fund (IMF), specifically with respect to actions taken by the State Bank of Pakistan (SBP). Firstly, rupee depreciation after the country adopted a market determined exchange rate agreed under the Extended Fund Facility programme led to a rupee erosion from 140 rupees to the dollar on average in May 2019 to the current over 168 rupees to the dollar. There are serious concerns that the depreciation led to an undervalued rupee today, a concern that has not been addressed, as yet, through credible research. Be that as it may, the rupee depreciation curtailed imports and thereby massively reduced the current account deficit but unfortunately raised the country's indebtedness as each rupee depreciation vis a vis the dollar adds around a 100 billion rupees to the country's debt. However, this relates to foreign debt alone which in dollar terms rose from 7.79 billion dollars in June 2018 to 11.82 billion dollars by June 2020 - a rise of nearly 52 percent.
Secondly, the SBP raised the discount rate to 13.25 percent effective 20 July 2019 till March 2020 when Covid-19 compelled a revisit to its extremely tight monetary policy. Disturbingly, the PTI government has raised domestic debt from 16.4 trillion rupees in June 2018 to 23.2 trillion rupees in June 2020 - a rise of 41.4 percent with the largest contributor being reliance on Pakistan Investment Bonds (PIBs) - from 3.4 trillion rupees in June 2018 to a whopping 12.8 trillion rupees by June 2020 which given the discount rate of 13.25 percent would add to the country's future debt significantly though the Prime Minister is on record as having stated it has reduced the burden of debt at present because PIBs are of a longer tenor, albeit with a higher interest rate.
Debt to GDP ratio is a source of concern in Pakistan though it is not as high as in Greece (176.7 percent), Italy 137.6 percent, Portugal 1230 percent and Belgium 104.4 percent in the first quarter of 2020. The reason: Pakistan does not have the backing of the powerful European Union. In the words of the IMF the Extended Fund Facility "aims to support the authorities' ambitious macroeconomic and structural reform agenda during the next three years. This includes improving public finances and reducing public debt through tax policy and administrative reforms to strengthen revenue mobilization and ensure a more equal and transparent distribution of the tax burden." Sadly, the macroeconomic and structural reforms agreed have not yet been implemented, reportedly the reason behind the stalled second staff-level agreement with the IMF, and the tax reforms remain pending with neither a more equal (with continued heavy reliance on indirect taxes whose incidence is greater on the poor than the rich), nor a more transparent distribution of the tax burden.
It is hoped that the government will focus on reducing the debt burden instead of increasing it, a situation that has surfaced due to the emphasis on primary deficit that excludes consideration of debt from the conditions agreed with the IMF. Debt is as much if not more of a concern than the 20 billion dollar current account deficit that the PTI administration inherited.
Copyright Business Recorder, 2020
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