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EDITORIAL: Domestic debt servicing has risen to 921 billion rupees in July-November 2020 projected at this rate to rise to 1.28 trillion rupees by end June 2021 subject to the proviso that there is no increase in reliance on domestic borrowing. This latest figure uploaded on the State Bank of Pakistan (SBP) website negates the government’s narrative repeated ad nauseum that it has implemented meaningful savings in its own expenditure and that foreign loans are being incurred to pay off past mainly foreign loans incurred by the previous administration. In the first five months of the current year alone domestic debt servicing reflective of a rise in domestic borrowing has risen by a whopping 38.4 percent – from 666 billion rupees July-November 2019. This does not include the government’s intent to issue Sukuk against pledge of some real estate as the rate of return and the amortization period have not yet been determined.

It is important to note that the rise in domestic borrowing is all the more significant given that the government has mainly relied on issuing Pakistan Investment Bonds (PIBs) to generate resources whose return is linked to the discount rate which has come down from 13.25 percent (July 2019 to March 2020) to 7 percent in the current fiscal year. The Khan administration inherited a total domestic debt of 16.4 trillion rupees in 2018 (with PML-N inheriting a domestic debt of 9.5 trillion rupees in 2013 indicating a 72 percent raise in five years) that has risen to 24.6 trillion rupees by November 2020 or a rise of 50 percent in just two years and three months. These are very disturbing figures and indicate: (i) that significant savings in the Presidency, the Prime Minister’s House, including a major drop in expenditure on foreign trips by the Prime Minister as well as administrative savings by several ministries and the freezing of public sector salaries, has not been enough to contain the need to borrow ever larger amounts to meet the budgeted expenditure. Business Recorder repeatedly pointed out that while the reduction in such expenditure was, besides being good optics, a step in the right direction, the amount allocated for these items was never that large as a percentage of the total budget to make much difference; (ii) current expenditure has continued to rise during the past two years and the only savings identified in the current year’s budget are associated with the G-20 countries deferring interest and payment of principal to those countries seeking a deferral; Pakistan requested such a deferral and was allowed about 1.2 trillion rupee deferral in the current year; and (iii) the development outlay has been budgeted to be reduced by 49 billion rupees federal and 238 billion rupees provincial in the current year (though it is unclear whether Sindh government will follow this exhortation). The government is a major contributor to output and GDP growth in Pakistan through its budgeted development outlay which, in turn, generates higher revenue and thereby reduces the need to borrow. A reduction in development expenditure would therefore reduce the growth rate and revenue sources of the government.

The Prime Minister while addressing the fourth session of United Nations Conference on Trade and Development sought allocation of special drawing rights of 500 billion dollars to help the most stressed out nations due to the pandemic. His critics may well argue that to make such a call is bound to be ignored during the ongoing global pandemic with creditor nations suffering a severe recession. The Prime Minister also noted that 7 trillion dollars are parked in haven destinations with one trillion dollars leaving the developing countries each year and urged these havens to remit the money to the countries of origin. This has been Imran Khan’s mantra for some time; however, so far there has been little if any success through successful convictions; the only successful conviction was in Nawaz Sharif’s case, during his own administration, though there has been zero repatriation of the mind-boggling wealth held by Nawaz Sharif and his family abroad or indeed even in Pakistan.

The government’s refusal to publicly acknowledge that domestic borrowing has reached a historic high, a reflection of its sustained failure to contain its own expenditures, has undermined its ability to tackle inflation effectively. And the Khan administration’s narrative that the economy has stabilized with the current account in surplus till November last year (with a deficit in December 2020) as proof of economic stabilization will find few takers, given the massive rise in domestic debt.

Copyright Business Recorder, 2021

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