I’m no economist per se. As an accountant, however, I’m deeply concerned at the steep hike of 150 basis points (1.5 percent) in the discount rate. This will further intensify the domestic or local debt trap for Pakistan. The government of Pakistan will be paying more out of its limited revenues for repayment of such debt. In simple terms, the cost of borrowing by the government of Pakistan has increased by approximately by 20% (1.5x7.25/100). It is very unfortunate that very few people are visualizing and commenting on this snare that has trapped us for the last over 40 years.
Generally, people are concerned about foreign debt. In my opinion the bigger issue is local debt which is now eating away much of our hard-earned revenue. It exceeded Defence expenditure in the last decade and the action now undertaken by the government will make things more difficult for it and the people.
A question arises whether Pakistan’s economy, after this increase in discount rate, could be treated as a ‘going concern’ under the generally acceptable accounting system. Many people will argue that normal accounting standards do not apply to states as they do to private persons. In my view, however, this view is not correct in substance. Just like any other person, if the resources, including anticipated avenues, are not sufficient to meet expenses in the foreseeable future then it means that the entity is not a ‘going concern’. The consequences of not being a ‘going concern are more serious in the case of a state as in this case if there is no investment in infrastructure and human resources then society will become unlivable in the forthcoming future. The state can be insulated from foreign or outside aggression on account of expense on Defence; however, if there is insolvency within, then in the ultimate analysis security will also be compromised.
As per Economic Survey of Pakistan, the local debt as at March 2021 is around Rs 25,000 billion. This debt is increasing every year by over Rs 1,500 billion to Rs 2,000 billion. Every year Pakistan pays around Rs 2,000 billion worth of interest on local debt which is acquired by way of a new debt of the same amount. After the current increase in the discount rate by State Bank of Pakistan (SBP) this amount will reach around Rs 2,500 billion per annum. Pakistan’s local or domestic debt in 1981 was only Rs 4,500 billion. This means that in a span of 40 years there has been a constant average increase of Rs 513 billion per year. Forty years ago, debt servicing was less than 20% percent of total tax revenues of the country. Now it has reached over 50% of total revenues of the country. The government is collecting taxes to pay interest on its borrowings.
Successive federal governments have borrowed 20,000 billion in the last 40 years and all the governments of past are squarely responsible for harming the economy of the country. The biggest mistake which Imran Khan’s government has made after coming to power is not presenting the ‘balance sheet’ of the country in 2018. It was the duty of Imran Khan to come to the public through the National Assembly and tell the people that Pakistan is virtually a ‘non-going concern’ and it is impossible to provide any substantial benefit to the people in these circumstances during at least the first term. Imran Khan’s government had realization of this situation only in the middle of 2019 when they had already served for over 120 days. The whole blame of mismanagement was shifted to the people who were not at all responsible for it. Even now, there is no short-term solution and it would be very difficult for the government, whosoever is in power, to make real investment in the country to improve the financial condition of the country in the short or medium term. Imran Khan has the capacity to take unusual actions as his hands are clean.
It is important to note that the government collects undue taxes by way of indirect taxes on items like petroleum, gas and electricity from the common man and pays the said sum by way of interest on debt obtained from the relatively upper class by way of interest on public debt. This disequilibrium is not sustainable. There is effectively no net saving on overall basis.
The increase in debt financing cost is not commensurate with the rise in the revenues of the government; therefore, in the ultimate analysis, the ‘expenditure’ that is to be incurred for other purposes, including investment (infrastructure and human resources) is compromised. If there is no investment then ultimately the capability of the shop to earn will decrease and there will be less and less revenue. The ultimate result of this trend is deterioration of the state machinery and service to the people. If this system continues then the business (state) will ultimately fail. This is an accountant’s analysis which may not be in line with economic theories. In the simple analysis as referred above, this debt trap cannot be broken with ordinary measures. There has to be some out of box solutions for it.
The interest paid by the government is ultimately received by the public. In the first mode the amount is directly paid by the government on National Savings Schemes. In the second mode, this money is received by the public in the form of interest on deposits from the commercial banks where the banks lend the money to the government. The difference is the banks’ spread.
The lack of investment is demonstrated by the fact that there has been no substantial investment in energy resources (dams), no investment in railway system (there is no dual track so far), no substantial investment in primary schools, no investment in primary health and other such purposes. The whole picture effectively means that the state has borrowed over Rs 20,000 billion in 40 years for meeting expenses not for investment. This is a criminal act or negligence. The bigger tragedy is that the present government is treading the same beaten path. This is suicidal. If we compare the public sector investment in India, Bangladesh and other regional countries then we can easily imagine the real difference that has occurred in the last 40 years. The region has developed and changed. We are still settling issues of
ideology and theology. When I was the President of South Asian Federation of Accountants having its headquarters in Delhi, I visited India in 2008, the Delhi and Mumbai airports were quite inferior to those in Karachi, Lahore or Islamabad. Later, I visited Delhi in 2017 and I observed that Delhi’s new airport is better than most of the airports in the world. India has laid a quadrangle road track covering the entire country. Pakistan has missed the boat and there should be no hesitation in admitting that Pakistan is now much behind India and Bangladesh in all our major economic indicators. The primary reason for it is mismanagement of public finance. The country does not appear to be a ‘going concern’.
There can be a long debate on the immediate-, medium- and long- term solutions to handle the issue of debt trap. Some of the pertinent issues are:
Bank’s spread on dealing in public debt is to be taxed at a higher rate;
Banks should be regulated to compulsorily invest in the public debt offering according to their deposit ratio and the cartelization of banks for achieving higher interest rates be finished. We as a country in the present circumstances cannot afford lenient kind of regulations for banks;
A portion of public debt held by the banks in the form of treasury bills be converted into twenty-year tenor bonds with a fixed rate;
Investment in public debt directly by the public be made easier and convenient so that there is saving in spreads of the bank;
NFC Award to be reconsidered with a compulsory contribution by the provincial governments for strategic investment in infrastructure, education and health. The present model has failed and the provincial governments have become ‘spending’ machines. I have witnessed it as a caretaker Finance Minister of Sindh in 2013;
NFC Award to be reconsidered also with respect to generation of revenues by the provincial governments. There should be a caveat in the Award that allocation from the federal government will only be available if there is a reasonably high contribution, say 30%, by way of provincial taxes such as taxes on properties and agricultural income tax;
Single treasury account be fully established and monitored and the funds lying in the commercial banks are to be utilized appropriately for reducing the public debt;
The quantum of currency in circulation be curtailed to reduce the pressure on interest rates due to the return available in cash debt market;
It is made mandatory for all the charitable trusts, including mosques and seminaries, to deposit their funds with National Bank of Pakistan;
These are some of the out of box solutions for getting the country out of the local domestic trap. Many people will disagree with these suggestions as these are unconventional. However, such people should realize that we are facing an extraordinarily extraordinary situation. Countries do not go bankrupt. But they become ‘failed’ states if their people are not properly cared for. I wrote ‘Pakistan not a failed state’ book in 2017. I still maintain it; however, we cannot afford further neglect in this sphere.
Copyright Business Recorder, 2021
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