Dr Pasha speaks about challenge of rising public debt

The medium term budgetary framework commits the government to reducing public debt to 60 per cent in the next five years but the speed with which it is borrowing, public debt will certainly increase, according to Dr Hafeez Pasha, former Advisor to Prime Minister on Finance.
Speaking at Aaj TV Programme 'Paisa Bolta Hai' with Anjum Ibrahim, Dr Pasha accused the government of violating the Fiscal Responsibility and Debt Limitation (FRDL) Act by extending sovereign guarantees and contingent liabilities of over 3 percent of GDP against the limit of 2 percent fixed in the Act.
Pasha said there was a rapid increase in sovereign guarantees subsequent to energy projects under the China Pakistan Economic Corridor (CPEC); and added that rapidly increasing external debt poses a challenge of default while contingent liabilities of Rs 2000 billion, which are not reflected in the public debt, are also a burden on the government and the people.
Dr Pasha further stated that sadly the government does not appear to be concerned with violating 2 percent of the GDP limit set in FRDL for both rupee and dollar sovereign guarantees and had breached it to reach 2.4 percent (Rs 800 billion) of GDP in June 2016. He maintained that sovereign guarantees stood at 2.7 percent of the GDP at present against the limit of 2 percent.
Pasha referred to two major contingent liabilities - power sector circular debt of Rs 650 and commodity financing of Rs 630 billion. If all contingent liabilities are included then Pakistan's total contingent liabilities are Rs 2000 billion and these are not reflected in the budget or public debt. The contingent liabilities would become unsustainable if financial condition of Public Sector Entities (PSEs) is not improved. Pasha further said if PSEs' financial condition continues to deteriorate then liabilities of the government and the people would increase at a fast pace.
Pasha said sovereign guarantees were increasing at a fast pace after the government began to extend them for energy projects under the CPEC and if contingent liabilities are included then 'the government has reached the figure of over 3 per cent of GDP'. He said it was inexplicable why sovereign guarantees are being extended to the private power sector companies under the CPEC, arguing that it was an inappropriate step. Dr Pasha said that there are two types of sovereign guarantees - in rupee and in dollar - and stated the government recently gave Rs 10 billion sovereign guarantee to Pakistan International Airlines (PIA) for repayment of debt and interest payment.
He said that Rs 160 billion outstanding guarantee to PIA may become government's liability in the coming years given the financial condition of the entity with the strategic partnership plan having been shelved and replaced by restructuring; Pakistan Steel Mills (PSM) is another liability, he said.
Dr Pasha said that most important provision in the FRDL law is to limit the country's public debt at 60 percent of the GDP, while public debt increased to 67 percent of the GDP at the end of 2015-16.
Pasha explained that there are two types of guarantees - one in local currency and the other in foreign currency. Sovereign guarantee is extended on equity, which is usually in dollars. He said that this debt is not included in the public debt though many countries include contingent liabilities and sovereign guarantees in the public debt.
Dr Pasha said that there is real danger of default on account of external debt, which has been increasing rapidly since the last three years and was $74 billion till June 2014. He added that another $4 billion dollars has been added during the last six months with a possibility of another $4 billion in the remaining six months of the current fiscal year. He suggested that the only way to avert default on external debt is growth in export and foreign direct investment inflows. He was optimistic that export incentive package would help increase exports.