Overcoming debt burden

The newly-elected Prime Minister, Imran Khan, after taking the oath of office, in his maiden address to the nation on August 19, 2018, very rightly observed that the most dreadful aspect of the five-year term (2013-18) of Pakistan Muslims League (Nawaz) [PMLN] was leaving behind a monstrous public debt. He quoted the figure of gross public debt of Rs 28 trillion whereas it was Rs 29.9 trillion as per statistics released by the State Bank of Pakistan (SBP) on August 15, 2018. SBP showed that in the last five years, total debt and liabilities increased Rs 13.5 trillion or 82.8% - unprecedented in the economic history of Pakistan.
Pushing Pakistan to horrific debt-enslavement on the part of PMLN is the worst one could expect from any responsible government. It was in utter violation of section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005 ["the Act] that says: "beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product." Instead of reducing and/or containing public debt at 60% of GDP, the government of PML-N increased it by 27%. Where is the economic wizard Ishaq Dar, who acted so callously? Where is Ahsan Iqbal, self-acclaimed development expert, who claimed to make Pakistan, Asian Tiger by 2025 and member of G-20 by 2020?
The provisions of section 3(a)/(b) of the Act have been breached by the government of PML-N with impunity. Section 3 of the Act says:
"In particular and without prejudice to the generality of the foregoing provisions, the following shall be the principles of sound fiscal and debt management, namely:-
(a) limiting the Federal fiscal deficit excluding foreign grants to four percent of gross domestic product during the three years, beginning from the financial year 2017-18, and maintaining it at a maximum of three and a half percent of the gross domestic product thereafter;
(b) ensuring that within a period of two financial years, beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product;
(c) ensuring that within a period of five financial years, beginning from the financial year 2018-19 total public debt shall be reduced by 0.5 percent every year and from 2023-24 and going up to financial year 2032-33 a reduction of 0.75 percent every year to reduce the total public debt to fifty percent of the estimated gross domestic product and thereafter maintaining it to fifty percent or less of the estimated gross domestic product; and
(d) not issuing new guarantees, including those for rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed, from time to time, for any amount exceeding two per cent of the estimated gross domestic product in any financial year:
Provided that the renewal of existing guarantees shall be considered as issuing a new guarantee
During the decade of democracy [2008-2018], the Opposition parties also showed complete apathy as none of them raised its voice in Parliament or in public gatherings on the issue of blatant violation of Fiscal Responsibility and Public Debt Limitation Act, 2005. None of the Opposition parties announced a shadow cabinet to prepare and make public White Paper on the issue. It was their duty to create public awareness about the deadly consequences of economic policies of PMLN, unveil their own plans/strategies to meet the requirements mentioned in section 3(c)/(d) of the Fiscal Responsibility and Public Debt Limitation Act, 2005.
The Parliament as a whole never addressed the issue of gross violation of the Fiscal Responsibility and Public Debt Limitation Act, 2005. The un-elected Finance Minister, Miftah Ismail, on May 14, 2018 presented before National Assembly, demanded a record borrowing of Rs 22 trillion in the coming fiscal year for retiring domestic and foreign debts and for debt servicing. In a report [To servicing maturing debt, Pakistan to borrow Rs 22 trillion in 2018-19], it is aptly highlighted that:
"The interest payments on domestic and foreign loans would consume roughly 31% or Rs 1.62 trillion of the proposed budget of Rs 5.247 trillion of the next fiscal year.... As against Rs 13.16 trillion borrowing in the outgoing fiscal year, the finance minister sought the National Assembly's approval for Rs 21.912 trillion as borrowing for repayment of domestic debt in the next fiscal year. The amount is 60.5% or nearly Rs 8 trillion higher than the outgoing fiscal year. This will expose the government to exploitation by commercial banks, which have already started dictating their terms due to mounting financing needs".
The start of term (2018-23) by the newly-formed coalition government of Pakistan Tehreek-e-Insaf (PTI) is with exceptional debt burden, courtesy imprudent policies of the so-called economic wizard of PMLN, who is now suspended senator/proclaimed offender avoiding cases pending in Accountability Court. His farcical claims of economic turnaround vis-à-vis record growth rate stand fully exposed. Indeed Pakistan is facing the worst ever fiscal, trade and current account deficits and insurmountable debt burden. The fiscal deficit for financial year 2017-18 touched the record figure of Rs 2.3 trillion (6.8% of GDP).
It needs to be highlight that in the wake of a weakening Pak Rupee, the debt payments/servicing of total external debt and liabilities of $91.8 billion (expected to rise to $109 billion by June 2019) is to the tune of $9.3 billion in the current fiscal year. This is slightly less than the gross official foreign currency reserves held by SBP. The arranging of huge funds of $9.3 billion poses a daunting challenge for PTI-coalition government in the coming days.
The position of gross domestic debt and liabilities is equally appalling. According to SBP, domestic debt surged to Rs 16.4 trillion with an addition of Rs 6.9 trillion in the past five years. The 242% growth in debts of Public Sector Enterprises (PSEs) in the last five years confirms failure of Dar's team to reform these white elephants. Total debt of PSEs was only Rs 312 billion in 2013 when PMLN assumed power and it increased to Rs 1.1 trillion at the end of their term. Will they blame Establishment and PPP for this disastrous performance? Interest payments on debt (Rs 1.33 trillion on domestic debt and Rs 172.4 billion on external debt), which stood at Rs 996 billion in 2013 increased to Rs 1.6 trillion as on June 30, 2018. In the address of Premier Imran, these latest figures were conspicuously missing!!
In a report, Pakistan to pay $9.3 billion in external debt servicing [The Express Tribune, August 23, 2018] it is highlighted:
"However, the caretaker government projected the overall gross financing requirements (external debt servicing and current account deficit) at $25-26 billion, which appeared to be on the downward side. It estimated the current account deficit in the range of $15-16 billion.
The current account deficit in July widened to $2.2 billion, higher by 14% over the same month of last year, the SBP reported on Monday. If corrective measures are not taken, the deficit will jump above $25 billion at the current pace. In its report, the caretaker government projected $4 billion in current account deficit in the first quarter and another $3.2 billion in the second quarter of the current fiscal year.
These projections suggest that the finance ministry did not reflect a true picture of the external sector, which often results in unnecessary pressure on the foreign currency reserves".
The latest figures of total public debt, available at the website of SBP present an alarming situation. There is another important document titled, Revision Study on External Debt Statistics, released by SBP that narrates the history of our economic subjugation that started in the 1960s when the rulers began taking large intakes of foreign loans. With every loan came a host of conditions. These conditions ostensibly aimed at reforms, in fact meant to subjugate us, economically and politically.
The consequences of present economic mess are obvious: more borrowing and taxes by the new government. More taxes will not only retard growth but also adversely affect fixed income earners and the poor. More loans will be taken to bridge fiscal and current account deficits and pay old loans. Enormous debt-servicing of nearly over Rs 1800 billion during the current fiscal year will further squeeze fiscal space. Pakistan is ensnared in a deadly debt trap where it is compelled to borrow more funds just to pay back old debts with interest. We have taken expensive internal and external loans to meet current expenditure and to bridge fiscal and current account deficits.
Finance Minister Asad Umar must brief the Prime Minister on obtaining soft project loans for development. Every country seeks such loans for infrastructure development that gives boost to rapid economic growth. The issue is how these soft external loans are utilized for the benefit of the country. India is the largest recipient of loans ($105 billion) from the World Bank. It is followed by Brazil ($58.8 billion), China ($55.6 billion), Mexico ($54 billion) and Indonesia ($50.5 billion). Indian utilization of such loans: water, sanitation and flood projects (27%), finance (19%), transportation (18%), education (11%), public administration and law (10%), agriculture (8%), health and social service (4%), information and communication (2%), and energy and mining (1%). India receives roughly half of its World Bank loans interest free. These are provided by the Bank's International Development Association. This agency provides grants and "credits", which are loans at zero interest, with a 0.75 percent finance charge. The remaining half of World Bank loans to India are provided by the International Bank for Reconstruction and Development, another World Bank agency which provides loans at low interest rates. Countries that borrow from the IBRD have more time to repay than if they borrowed from a commercial bank-15 to 20 years with a three-to-five-year grace period before the repayment of principal begins.
It is an admitted fact that our economic managers, during the military and civilian rules alike, have been borrowing recklessly. What made the situation more painful was abuse of funds-wasted on huge perks and perquisites to the privileged classes and not for economic uplift of the country. Today's Pakistan represents a state where a trio of militro-judicial-civil complex, businessmen-turned-politicians and absentee landlords sitting in houses of parliament, is very affluent, but the Government is poor, needing loans even to pay its employees' salaries and other day to day expenses. This state of affairs is the direct outcome of the policies of successive governments, giving a free hand to tax evaders and plunderers of national wealth.
The real challenge is how to break away from this debt-prison. The key to debt retirement is export-driven growth and collection of taxes fairly and justly, but firmly, without any favour or fear. The real tax potential of undeclared income/wealth in Pakistan is Rs 8 trillion. For achieving these goals no concrete plans based on pragmatic and sound research are available with PTI! So far, there is only a desire on the part of PTI to revive the economy, but how this is to be done is still the missing link. From rhetoric to reality will be the real challenge in the coming days for the PTI's economic team. The outrageous debt burden and huge fiscal and current account deficits are symptoms of an ailing economy. The symptoms will keep on recurring unless the causes for illness are diagnosed and cured. The removal of causes of illness (elitist economic structure and crony capitalism) is a specialised job for which no preparation has yet been made by PTI.
For retirement of debts and tax reforms concerted efforts are required that are based on informed decisions arrived as a result of research and debate. No such exercise has been undertaken by PTI, showing it was not anticipating being in power in 2018 or its lead persons are as lethargic as those of other parties.
PTI never thought of establishing knowledge-based research platforms for all sectors that need reforms. For example, not a single study is available with PTI outlining stage-wise steps for tax reforms or promoting tourism. The word "reforms" is a cliché unless backed by a plan and strategy to implement. PTI, like other parties, lacks a plan to restructure and revamp the tax system. Mere appointment of an "honest and efficient FBR chairman" will not bring required tax reforms. We can collect revenue of Rs 8 trillion at federal level alone if there is political will and Federal Board of Revenue is converted into an efficient and professional agency on the pattern of Canadian Revenue Agency.
The collection of taxes of Rs 8 trillion will not only eliminate fiscal deficit but provide ample funds for infrastructure projects, human resource development, health, education, transport and housing. With accelerated growth in agriculture and agro-based value added industries, export-oriented industrialisation, Pakistan can retire external and internal debts.
The path to prosperity and self-reliance lies in convincing the masses that money collected as taxes would be spent on their well-being and not on unprecedented benefits for the elites. But this promise in itself is not sufficient. We need a system designed to provide the masses quality health and educational facilities, decent housing and transport. Desire and actions must go hand in hand for achieving the objectives. PTI so far has just many desires but no action plan. Good intentions, sincerity, and clichés alone will not bring the desired results. It is high time that PTI come out of complacency and work on system designs seeking the professional advice to undertake much-needed and long-delayed structural reforms in all spheres of governance.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)