This is apropos an article titled "It's time to blame the PM" carried by Business Recorder on 30th November, the writer contends the Prime Minister continues to ignore four alarming trends in the economy. First, a massive rise in external and domestic borrowing, second a decline in exports is attributed not as much to security threats but to keep the rupee overvalued, thirdly, foreign direct investment is declining and finally, poor governance.
The government is following a very comprehensive reforms agenda to reinvigorate the economy, spur growth, maintain price stability, provide jobs to the youth and rebuild the key infrastructure of the country, which are the main feature of government's manifesto. The international rating agencies have upgraded their outlook of Pakistan. Foreign investors' fears about the investment climate in Pakistan have largely dissipated due to improved law and order situation and a healthier outlook on the political and economic fronts in the country.
The reserves have built up which are crucial in providing a buffer against shocks in the external sector.
The continued presence in the international financial market have reposed investor's confidence which is evident that Pakistan successfully launched Euro and Sukuk Bonds along with signed a $46 billion investment program with China.
These are some of the milestone achievements, which the writer needs to realise and acknowledge otherwise we may not be communicating with each other.
Let's take the first so-called alert regarding public debt. The writer has failed to understand the debt dynamics and, therefore, has presented a highly misleading picture of the debt evolution. She claims that there has been a massive increase in external and domestic borrowing, without citing a single statistic in support of her claim. The fact is that the public debt is always understood in comparison to the level of GDP. In this regard debt to GDP is on a declining trend ie from 63.9 at the end of 2012-13 to 63.4 at the end of 2014-15. Moreover, so long as there is budget deficit, there will be a need to finance it from either domestic or external sources. The budget deficit is announced at the time of the budget and hence the level of borrowing is announced at the beginning of the year. The public external debt numbers quoted in the article are overstated. The external public debt as at end September 2015 was US $51.5 billion (including IMF and all Eurobonds). The domestic debt is quoted as Rs 2 trillion in 2013 rising to Rs 20.7 trillion. This is incorrect and correct numbers are Rs 9.5 trillion in 2013 rising to Rs 12.7 trillion at end September 2015. Moreover, the writer has taken other non-government debt in her assessment, which is not correct as by definition these are not considered public debt since their debt servicing is not an obligation on the Federal Government Budget.
It is also not correct that Euro Bond has weakened debt affordability of the country. It may be noted that the share of all bonds is less than 10%of external debt and the rest is owed to multilateral and bilateral creditors. This debt is extremely concessional carrying interest rates of less than 2%. Further, the Eurobond has great significance for Pakistan, as it not only introduced Pakistan back in the international capital market after 7 years but also allowed access to cheaper foreign resources for building country's reserves, which have paved the way for exchange rate stability and appreciation. Moreover resources mobilised through the Eurobonds have gone to retire expensive domestic debt, which is carrying a higher interest rate of 9.3% compared to 8.25% on the Eurobond. Moreover, the foreign exchange proceeds of Eurobond will cover the forthcoming maturity of a similar bond issued in 2006 and maturing in March 2016, and hence would not be a burden on reserves.
More importantly, the writer is perhaps unaware that almost all indicators of debt sustainability have improved during the last two fiscal years. The refinancing risk of the domestic debt reduced at the end of 2014-15 as indicated by the percentage of domestic debt maturing in one year reduced to 47 percent compared with 64 percent at the end of 2012-13. Exposure to interest rate risk reduced as percentage of debt requiring re-fixing in one year decreased to 40 percent at the end of 2014-15 as compared with 52 percent at the end of 2012-13. The share of external loans maturing within one year is equal to around 28 percent of official liquid reserves at the end of 2014-15 as compared with around 69 percent at the end of 2012-13 indicating a sharp improvement in foreign exchange stability and repayment capacity.
The second alert is regarding the exports performance. The decline in exports is mostly due to adverse terms of trade triggered by massive reduction in commodity prices and weak global demand. Despite these challenges, our exports have fared better than other regional economies, which have experienced double digit decline in their exports compared to only 3.7% decline in our exports. In a large number of items we have exported more quantities but have earned a lesser value because of adverse price effect. The exchange rate in Pakistan is market determined in the interbank market, where State Bank does not interfere.
The third alert is the behaviour of the foreign investment. During the tenure of the present government more than $2.5 billion have already arrived in the form of some major transactions such as auction of the 3G-4G licenses and divestment of shares in UBL and HBL. The process of foreign investment takes time. Investors' confidence about economic policies and law and order is improving. The foreign direct investment was rising during July-September but declined during July-October period. There are cyclicalities in this area and going forward we are confident of a rising trend, even though these inflows remain modest compared to the potential this country has. Having said this, the overall investment in the country is rising as the investment to GDP ratio rose from 14.9% in 2012-13 to 15.1% in 2014-15 and is projected to rise to 17.7% during 2015-16. There is a very large number of public sector investments undertaken both at federal and provincial levels. The combined investment of federal and provincial governments rose to Rs 1113.2 billion in 2014-15 compared to a meager Rs 777.1 billion recorded in 2012-13. It is because of such investments that the GDP growth has risen from an average of 3% during 2008-09 to 2012-13 to 4.03% in 2013-14 and then to 4.24% during 2014-15 and is projected to rise to 5.5% during the current fiscal year. Accordingly, by looking at foreign direct investment no conclusion can be drawn on overall level of investment.
The final alert is on the governance. The writer has not mentioned anything as to what is wrong with governance. The Government is fully committed to good governance. It has started operation Zarb-e-Azb to root out terrorism from the country. It has greatly improved the situation in Balochistan and Karachi has witnessed the most peaceful environment in at least a decade. The government is tackling the problem of power load-shedding and in the last more than two years the problem has greatly reduced. More importantly, in view of the incipient expansion in the power capacity (more than 5000MW before June 2018), the menace of load shedding would be comprehensively eliminated. Nothing speaks for responsible economic management practised by the Government than the uninterrupted implementation of the 3-year IMF programme under which 9 reviews have been completed. There is no previous example of a Fund programme that has run for such a long time under a democratic government. This is a reflection of good governance practised by the present government.
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