EDITORIAL: Domestic debt and liabilities rose to 26.75 trillion rupees by end May 2021 against 23.87 trillion rupees in June 2020 – a rise of 12 percent in just 11 months; however, the situation is considerably more ominous when compared to the 16.5 trillion rupees that the Khan administration inherited which indicates a massive rise in reliance on domestic debt to fund government expenditure by 62.5 percent in three months less than three years.
Comparisons from the budget 2017-18, the last year in the five-year tenure of the PML-N administration which ended the last day of May 2018, are relevant: (i) total expenditure for 2017-18 was budgeted at 4,752.9 billion rupees against 8,487 billion rupees for 2021-22 or a rise of 79 percent with current expenditure projected at 3,477 billion rupees (other development expenditure at 152.2 billion rupees with 121 billion rupees earmarked for Benazir Income Support Programme which is credited in grants and transfers today) and 7,524 billion rupees in 2021-22, a rise of over 100 percent; (ii) Public Sector Development Programme was budgeted at one trillion rupees in 2017-18, not fully disbursed, while 900 billion rupees has been budgeted in the current year; (iii) tax revenue was budgeted at 4,330.5 billion rupees in 2017-18 and is budgeted at 5,829 billion rupees for the current year or a rise of only 34.5 percent. Non-tax revenue was budgeted at 980 billion rupees in 2017-18 against 2,080 billion rupees in 2021-22 or a rise of 112 percent with a major increase in State Bank of Pakistan’s profits estimated at 260 billion rupees in 2017-18 and 650 billion rupees in the current year; (iv) pensions were budgeted at 248 billion rupees in 2017-18 against 480 billion rupees next year, a ticking bomb that would continue to rise requiring major policy changes, including employee contributions; (v) interest payments were calculated at 1,363 billion rupees in 2017-18 against 3,059.6 billion rupees in 2021-22 or a rise of 124 percent in three years; and (vi) deficit was budgeted at 1,479.6 billion rupees in 2017-18 and 3,990 billion rupees in the current year or a rise of 170 percent.
The rise in borrowing costs during the Khan administration therefore can be attributed to the massive rise in expenditure, notwithstanding the claims of significant savings by the Prime Minister, the President and federal ministries which nonetheless needs to be appreciated. Two other factors, however, also played a role in increasing domestic indebtedness. First, the decision to convert short- term debt to long-term debt at a time when the discount rate was prohibitively high at 13.25 percent anted up the debt servicing costs significantly. And second, raising reliance on Pakistan Investment Bonds (PIBs) at the time the discount rate was high – from 3,413 billion rupees in 2018 to 10,933 billion rupees in 2019 – a reliance that rose to 12,254.5 billion rupees by March 2020 (after which the discount rate was reduced over a three-month period to tackle the Covid-19 onslaught) and 14,374.5 billion rupees by March 2021 as noted by the Economic Survey 2020-21. However, budget documents 2021-22 give a much lower figure of 743,465 million rupees PIBs for last year and 751,139 million rupees for the current year. What is significant is that the Shaukat Tarin-led Finance Ministry envisions a dramatic rise in sukuk bonds – from 437,410 million rupees in the revised estimates of last year to 1,200,000 million rupees in the current year – a rise of 174 percent which is projected at a lower cost relative to PIBs time will tell at what rate these bonds are actually marketed as their rates are determined by the prevalent market conditions which remain a source of concern today especially given that the International Monetary Fund’s sixth review remains inconclusive.
Borrowing domestically is a highly inflationary policy though the government has yet to acknowledge that this is also a contributor to high inflation in the country today, which is well above the rates prevalent in other regional countries. And what is of further concern is the energy sector circular debt of over 2.6 trillion rupees that is another major drain on the economy.
Given Prime Minister Imran Khan’s repeated allegations of previous administrations jacking up the debt to fund wasteful expenditure and corruption, one would have hoped that during his tenure velocity of debt accumulation would have declined. Sadly, it is rising and one would sincerely hope that in the remaining two years of his tenure the trend of rising debt is arrested and, ideally, reversed though that is not the usual practice in an election year.
Copyright Business Recorder, 2021
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