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EDITORIAL: The State Bank of Pakistan has updated data on foreign domestic debt as well as investment inflows incurred for the period July-December 2020. Domestic debt rose from around 16.4 trillion rupees at the time the Pakistan Tehrik-e-Insaaf (PTI) government came to power in August 2018 to 20.7 trillion rupees by June 2019 to a whopping 22.4 trillion rupees by March 2020 (pre-Covid19) and to 23.9 trillion rupees by October 2020 – a rise of 46 percent in two years as the data uploaded on the website is inexplicably till October 2020. At this rate domestic debt may more than double till the end of the tenure of the incumbent government.

The single largest contributor to this increase in domestic debt is Pakistan Investment Bonds (PIBs) with a rate of return sourced to the discount rate – from a low of 3.4 trillion rupees by June 2018 to 10.9 trillion rupees June 2019 (with the rate hiked up to 12.25 percent in May 2019), to 12.25 trillion rupees by March 2020 when the rate was 13.25 percent (effective 20 July 2029 till March 2020) to 13.8 trillion rupees by October 2020 at a rate readjusted in four steps down to 7 percent as at present. This is extremely disturbing for two reasons. First, reliance on domestic debt impacts on the rate of inflation and perhaps it is time for the PTI government to desist from laying the entire blame of a sustained rise in prices, estimated last at 8.4 percent by the Pakistan Bureau of Statistics, on the “mafia” defined as those who collude to curtail supply to raise prices, smugglers and profiteers. There is a need for the government’s economic managers to not only undertake a study to determine the impact of this massive rise in domestic debt on inflation but also on the budget deficit that is projected at over 7 percent for the current year, which is unsustainable by all counts.

And secondly, the 7 percent discount rate is still one of the highest in the region as well as globally given the continued onslaught of the pandemic and therefore one would have hoped that to reduce domestic borrowing greater reliance had been placed on curtailing expenditure rather than in keeping the discount rate around 1.5 percentage points lower than the consumer price index which constitutes items that are not responsive to a discount rate and closer to 2 percentage points higher than the core inflation.

The government claims that it did not borrow from SBP during 2019-20 (July-June); however, what is conveniently glossed over is that whenever the country has been on an International Monetary Fund (IMF) programme borrowing from the SBP is down to zero as per a standard IMF condition and, unlike in the past, just prior to going on the Fund programme the country’s economic team leaders engaged in heavy SBP lending to the government (May to June 2018-19) and therefore this claim has little merit.

Foreign private investment declined from 1,376 million dollars in July-December 2019 to 708 million dollars in the comparable period 2020 - a decline of 49 percent, with inflows declining from 1748.6 to 1535.4 million dollars (a decline of 12.2 percent) while outflows rose from 391.2 million dollars to 582.8 million dollars (a rise of 49 percent). Portfolio investment rose from 18.8 in July-December 2019 (in spite of the very high discount rate of 13.25 percent to attract hot money) to 244.4 million dollars in the comparable period of 2020. Foreign public investment was 452.2 million dollars in July-December 2019 and plummeted to 193.8 million dollars as China Pakistan Economic Corridor projects slowed down due to the completion of physical infrastructure projects and the lack of counterpart funds available by a cash-strapped government. The recently uploaded data should be a source of serious concern to the government and one would hope that the Prime Minister takes serious cognizance of the heavy reliance on domestic borrowing and the decline in foreign investment as indicative of the fragility of the economy.

Copyright Business Recorder, 2021

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