EDITORIAL: Irrespective of claims of borrowing only to repay loans incurred by previous corrupt governments, the State Bank of Pakistan (SBP) data indicates that total debt (domestic and external) rose to 42.76 trillion rupees by 28 February 2022 against 38 trillion rupees in March 2021 and 24.9 trillion rupees in 2018 as per the Economic Survey 2020-21 — an unprecedented rise of 71 percent in just three and a half years.
This disturbing data may not have been available to the Prime Minister, though a ballpark figure should have been available to his economic team leaders when he announced his relief package on 28 February 2022 which is projected to cost the treasury 63 billion rupees every fortnight (subsidies and loss of revenue) at existing international price of petroleum and products.
The then Prime Minister’s argument that higher tax collections will fund the relief package are invalid because: (i) collections in July-February 2022 exceeded the target by only 268 billion rupees, clearly not enough to fund the package; and (ii) 52 percent of the tax collections were from import taxes and with a widening trade deficit to an alarming 35.39 billion dollars (July-March 2022) the need to check imports through implementing severely contractionary policies has resurfaced which would make it impossible to meet the tax collection target for the remaining three months of the current year.
While Imran Khan certainly skimped on his foreign tours as well as in reducing the expenditure on the Prime Minister’s House together with sale of water buffaloes and cars yet these savings were lower than half a percentage point of the federal government’s total budget. His administration raised current expenditure from 4.3 trillion rupees in 2017-18 (including Benazir Income Support Programme which was listed under expenditure outside Public Sector Development Programme at the time) to more than the budgeted 7.5 trillion rupees if one adds the relief package. And to fund this amount required him to borrow. And borrowing is not only highly inflationary, which explains why his government has been unable to check the rise in inflation, but its servicing costs and repayment of principal as and when due also accounts for an ever-rising percentage of the budget.
Foreign debt has risen from around 95 billion dollars in 2018 to over 130 billion dollars today with the government acknowledging in parliament that 10 billion dollars was used for budget support. The external debt repayments have not been highlighted in the post-2020 budgets because of the debt relief initiative by the G-7 countries due to Covid, which Pakistan availed. However, the eroding rupee, a symptom as opposed to the actual malaise, is due to economic (domestic inflation is higher than that in countries with which we trade, interest rate is double the regional average barring Sri Lanka, balance of payment position is a source of concern) as well as the political factors are undermining a favourable perception in the markets.
The island country has been unable to grapple with high prices due to external factors (Russia-Ukraine war and the pandemic effect) but also due to heavy reliance on external borrowing to fund social sector projects which led to a massive deficit with the President opting to slash taxes to fuel productivity (reminiscent of 1 March industrial package announced by the then Prime Minister Imran Khan) which have worsened the outlook. There is an emergent need to undertake appropriate mitigating measures before a situation similar to Sri Lanka’s unfolds including disruptive public protests.
Domestic debt in 2018, as per the Economic Survey 2020-21, was 16.4 trillion rupees, rose to 25.5 trillion rupees by March 2021 and by February 2022 had risen to 28.2 trillion rupees — a rise of nearly 72 percent in three years and a half. During the PML-N years (2013-18), domestic debt rose from 9.52 trillion rupees to 16.4 trillion rupees or a rise of 72.6 percent but over five years sourced mainly to heavier reliance on treasury bills. Reliance on Pakistan Investment Bonds, linked to the discount rate, rose from 1.32 trillion rupees in 2013 to 3.4 trillion rupees by June 2018; however, this was further raised to 10.9 trillion rupees by June 2019 to 16 trillion rupees by February 2022 accounting for the jump in domestic debt servicing cost in the budget — from 1.23 trillion rupees in 2017-18 to 2.75 trillion rupees in the current year’s budget or a 117 percent rise during the last three and a half years. And if one adds the element of high discount rates — from 13.25 percent July 2019 till the onset of Covid-19 when it was reduced in phases to 7 percent and raised again recently to 9.75 percent.
It is important to note that all the prevailing poor economic indicators can be placed at the doorstep of external factors and the economy simply cannot withstand any further shocks — external or internal be they economic or political.
Copyright Business Recorder, 2022