In terms of new commitments, the Government of Pakistan signed new agreements, worth USD 7,228 million, during the period under review. These commitments comprised financing agreements signed with foreign commercial banks and multilateral and bilateral development partners.
Of these commitments, the largest share was committed by the multilateral partners i.e., USD 5,289 million, followed by bilateral development partners (USD 1,039 million) and the foreign commercial banks (USD 900 million).
In terms of sectoral project financing, USD 2,767 million was committed for physical planning and housing, governance, research and statistics, floods—2022, agriculture, transport and communication, energy and power, and health and nutrition sectors—‘Third Quarterly Report on Foreign Economic Assistance, July 2022–March 2023’, Policy Analysis & Development Wing, Ministry of Economic Affairs, Government of Pakistan
Public debts exert a twofold influence on the economy. When managed prudently, they can strengthen fiscal responsibility, stimulate economic expansion, and provide support for crucial humanitarian efforts and disaster response.
On the contrary, if these resources are misallocated or mismanaged, they can curtail citizens’ economic prospects, diminish space for private investment, reduce available capital for businesses, worsen income inequality, and place the burden of debt repayment squarely on the shoulders of the populace through taxes, duties, and elevated energy and electricity costs etc.
The people of Pakistan are presently facing a similar dilemma. Monstrous external public debt burden and its (mis)mismanagement has pushed the country to a position where the government is transferring the incidence of its repayment to the poor through imposition of taxes and by increasing the prices of utility bills. For instance, costs of electricity and petroleum products have surged to a point where they have become simply unaffordable for an average citizen.
Imposition of taxes, particularly indirect, without assessing its proper impact on individuals’ income, and solely relying on consumption of expensive electricity, is imprudent and an unwise policy for resource mobilisation, particularly when threshold for filing income tax return is fixed at Rs 600,000 per annum, and the minimum wage is around Rs 35,000 per month.
Even though, they work more than 16 hours a day, majority Pakistanis do not get the officially-fixed minimum wage. Under these circumstances, imposition of withholding income tax on their utility bills being “non-filers” amounts to a brutal, brazen and unjustified additional burden when not less than 60 million hapless citizens are living below poverty line.
Another significant factor contributing to strain the already ailing economy is the heavy burden of external loans, taken to improve foreign exchange reserves. Annual debt repayments have far exceeded our existing foreign exchange reserves.
As a result of which and other factors, this has been perpetually depreciating the value of Pakistani Rupee. Persistent pressure on foreign exchange reserves has led market forces to dictate the price of US dollar, continuously establishing new daily benchmarks—having already crossed the threshold of Rs 300.
At present, no clear solution is in the offing for generating sufficient revenues to address the repayment challenge without exerting pressure on forex reserves, which would inevitably affect ordinary citizens. In the meantime, the government’s strategy to bridge these gaps by seeking additional loans from multilateral and bilateral partners, is proving to be disastrous, adding to country’s chronic fiscal woes.
The Third Quarterly Report on Foreign Economic Assistance, issued on August 21, 2023 by the Ministry of Economic Affairs, highlights the “fresh commitments made by development partners” from July 2022 to March 2023.
During this period, the government secured new agreements totaling US$ 7.228 billion with its development partners, comprising US$ 5.289 billion from multilateral partners, US$ 900 million from foreign commercial banks, and US$ 1,039 million from bilateral partners. However, this Report does not encompass figures for the last quarter from April 2023 to June 2023.
When compared to the previous year during the same period (July 2021—March 2022), there were new commitments totaling US$ 11.321 billion. These commitments included US$ 2.440 billion from multilateral partners, US$ 1.397 billion from bilateral partners, US$ 2.484 billion from foreign commercial banks, US$ 2 billion from Eurobonds, and a total of US$ 3 billion from time deposits.
The new financing commitments for July 2022-March 2023 included US$ 2.767 billion for project financing, US$ 2.4 billion for programme financing, US$ 1.161 billion for commodity financing while budgetary supports to meet liquidity requirements included US$ 900 million.
Whereas, the coalition government of Pakistan Tehreek-e-Insaf (PTI) sought project financing of US$ 1.275 billion, and programme financing of US$ 600 million, while securing a substantial US$ 7.484 billion for balance of payment/budgetary support and US$ 1.962 billion for commodity financing.
This indicates that the alliance government of Pakistan Democratic Movement (PDM), when pursuing new commitments for loan acquisition, placed a greater emphasis on project and programme financing. In contrast, the government of PTI leaned more towards ‘Balance of Payments and Budgetary Support’.
The Report indicates that between July 2022 and March 2023, disbursements totaling US$ 7.765 billion were received from a range of sources, including multilateral and bilateral development partners, as well as financial institutions.
Bifurcation of disbursement amount includes US$ 4.022 billion originated from multilateral development partners, with a significant portion provided by institutions such as the Asian Development Bank (ADB), World Bank (WB), and Asian Infrastructure Investment Bank (AIIB), accounting for approximately 52% of the total funding commitments made during that period.
A breakdown of the disbursements shows that US$ 1.166 billion was received from the International Monetary Fund (IMF), constituting 15% of the total disbursement. Likewise, US$ 1.065 billion came from bilateral development partners, including countries like Saudi Arabia, China, Japan, the United States, and Korea, accounting for 14% of the total disbursements. Additionally, US$ 900 million originated from foreign commercial banks, while US$ 612 million was acquired through Naya Pakistan Certificates (NPCs).
Unfortunately, the major portion of US$ 1.374 billion in debt associated with project financing was allocated to the energy and power sector, amounting to approximately 27% of the total sum.
Environment, physical planning, and housing sectors received 12%, while governance, research and statistics sectors were allotted 9%. Similarly, transport and communication, as well as response to the 2022 floods, each received 7%.
Agriculture and water sectors accounted for 5%, while other sectors like rural development and poverty alleviation, health and nutrition, education, social welfare, and miscellaneous sectors collectively received 5%, 4.6%, 1.6%, and 1.1%, respectively.
These facts highlight that a significant portion of project financing continues to be allocated to the power and energy sector, rather than addressing critical areas such as social development, poverty reduction, education, and healthcare.
The IMF and financial experts consistently emphasize upon the need for implementing reforms in the power and energy sector to enhance efficiency and curtail revenue losses. Redirected resources from this sector could have been channeled into improving social indicators but no efforts were made by the governments in power.
Despite providing costly electricity to citizens, the amount of circular debt is accumulating every year and has reached over 2.3 trillion.
On the other hand, the per unit cost of electricity has exceeded the critical threshold of Rs 50 by clubbing the rates of both peak and off-peak hours. When factoring in additional costs such as sales tax, withholding income tax, financial cost (FC), surcharge, fuel price adjustments, excise duty, television license fee, and other taxes including the impact of transmission and distribution losses, including theft, the overall cost further escalates.
Addressing these challenges necessitates the initiation and implementation of structural reforms on an urgent basis. Furthermore, as member of global community, it is imperative that workers are treated with dignity and paid fairly for their labour.
The government should consider implementing a standardized 40-hour work week for all employees, both in the public and private sectors, and encourage private employers to ensure minimum wage for their workers. This approach is not only going to elevate workers’ incomes, but will also provide them spare time to explore additional employment opportunities, ultimately bolstering their earnings and purchasing power to contend with the current high inflation.
The conventional methods employed by successive governments for tackling the daunting challenges have proved totally ineffective in this age of technology where leapfrogging is possible by improving the human capital in IT and AI. It is about time we explored innovative and unconventional strategies to put our country and the nation back on the road to prosperity.
(Huzaima Bukhari & Dr. Ikramul Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)
Copyright Business Recorder, 2023