Is the government of Pakistan getting into a debt trap? Probably yes. Back in 2014, this space cautioned about the looming debt trap due to running expansionary fiscal policies on debt, and reiterated it again and again. Five years down the road, we are facing the music. The story of debt accumulation started back in 2008 - transition to democracy, and subsequent success of 18th amendment and 7th NFC award.
Pakistan debt reached its peak back in 90s. The debt reduction started happening between 2001 and 2007 when the government debt to GDP reduced from 81 percent to 52 percent. The story was that the interest rates were low and a few sectors (financial, media and telecom) were de-regularized, and the private sector was spending while government was consolidating – it is called expansionary fiscal consolidation.
The trend reversed in the last year of Mushrarraf regime (57% of GDP in 2009), and it paced up in the past four years - as of March 2019, the debt to GDP ratio reached at 74 percent of GDP. The worry is that it does not seem to decline anytime soon, especially when the IMF programme is focusing on primary deficit, not the overall fiscal deficit.
The fiscal deficit is to hover around 7.5-7.7 percent of GDP in FY19, and within it the primary deficit (excluding debt servicing) would be around 2.4-2.6 percent of GDP. The highest surge is due to growing debt servicing - government is accumulating more debt to pay the existing debt, and hike in interest rate is speeding the debt increase to service the existing debt. Quite some trap.
What could happen in coming year or two is portrayed as follows. The government is targeting 34 percent growth in tax revenues which has never happened in the history of the country, and is unlikely to happen in current set up. There will be a case of new taxes, end of exemptions, higher GST and other indirect taxes. That will bring inflation and squeeze the private sector led growth including exports.
To counter inflation, interest rates - already more than doubled in past 18 months, will increase further. This will exert an additional stress to private sector on top of new taxes. The private sector led growth will be compromised, and reduce the ability to pay taxes.
Anyhow, if we assume, by some magic wand, 0.6 percent of primary deficit is achieved. What about the overall fiscal deficit? What about the debt servicing? The interest payment will increase further and is expected to reach Rs2.6-2.7 trillion which will be 6.2-6.4 percent of GDP at expected Rs42 trillion GDP in FY20. Including 0.6 percent of primary deficit, the number will reach 6.8-7 percent of GDP.
And realistically, the primary deficit will not improve much. The tax revenues at best may increase by Rs1 trillion instead of Rs1.5 trillion incremental target. The primary deficit would be around 1.6-1.8 percent of GDP instead of 0.6 percent of GDP. And the overall fiscal deficit would be 7.8-8 percent of GDP in FY20 versus 7.5-7.7 percent expected in FY19.
The question the policymakers need to ask is what improvements too much new taxes and high interest rates will bring to the economy. This recipe may lead to a debt trap. Dealing with fiscal mess through private sector led expansion should be the strategy. There is a slack in private sector and that potential cannot be harnessed in days of high interest rates.
The only way to sustainably lower the fiscal debt is by having economic growth. We need to rethink the development spending using private sector money. Otherwise, we would keep on borrowing the old debt by acquiring new debt.
Comments
Comments are closed.