Pakistan Tehrik-i-Insaaf (PTI) in government has taken a u-turn on several of its pre-election manifesto pledges in its sixteen months in power with the prime minister publicly acknowledging that he became the prime minister by taking a u-turn, perhaps a reference to a large number of defections from other parties to the PTI before and after the July 2018 elections, while maintaining that "I make compromises for achieving my goals, rather than compromising on my goals."
While making political u-turns or compromises is understandable as without them Imran Khan may not have been able to form a government yet he is being accused of compromising in the economic arena. His critics further maintain that subsequent to forming the government for the first time, and gradually becoming familiar with the constraints under which administrations operate necessitating a u-turn on several economic manifesto pledges, Imran Khan has compromised on his initially much-praised pledge: to slash reliance on foreign loans. Data suggests the veracity of this charge as according to The Economic Survey 2018-19 released just before the budget 2019-20 was announced (June 2019) during the Zardari years (2008-13) Pakistan's total external debt rose from 41.7 billion dollars to 48.1 billion dollars, a rise of 6.4 billion dollars while during the disastrous Ishaq Dar/Miftah Ismail years it rose to 70 billion dollars - a rise of nearly 21 billion dollars.
So how much does the Khan administration envisage reliance on external funding during its tenure? DR Hafeez Sheikh, Advisor to the Prime Minister on Finance and Dr Reza Baqir, Governor State Bank of Pakistan, have pledged in writing that "the current projections suggest that with the policies outlined in this memorandum (Memorandum on Economic and Financial Policies agreed with the International Monetary Fund) the financing needs for the next thirty nine months (the program period) will amount to 38.6 billion dollars." This requirement is well above the amount jointly borrowed during the ten years of the Zardari/Nawaz Sharif years.
The Khan administration maintains that the need for such a massive increase in external borrowing stems from the need to pay off loans incurred during the previous administration. Debt servicing of external loans amounted to 3 billion dollars in the first quarter of the current year and is projected at a whopping 17 billion dollars by the end of 2019-20 - 12.5 billion dollars repayment of the principle and the remaining interest on the debt. A major part is attributable to the high annual returns as well as maturity of debt equity through issuance of Sukuk and Eurobonds during the Dar years (total amount issued 7 billion dollars). In other words, the government will have to repay more this year than it did last year (11.58 billion dollars) with respect to external debt.
The government has rolled over bilateral foreign debt with friendly countries particularly from China, Saudi Arabia and the UAE who have pledged "to maintain their exposure throughout the (IMF) program period", but loans acquired from commercial banks and multilaterals have not been rolled over.
Today in spite of the IMF programme (with an applicable interest of 4 percent) during which the debtor country relies on multilateral concessional support to meet the programme requirements, the Khan administration (18 August 2018 to 30 September 2019) relied the most on commercial borrowing - to the tune of 4.8 billion dollars (short term with no grace period) followed by multilaterals to the tune of 2.75 billion dollars. Bilaterals lent 1.82 billion dollars during the period at a rate lower than the IMF rate, China lent 253 million dollars at 5.2 percent rate (maturing from between 12 to 20 years) while the rest of the 1.53 billion dollars lent by China was at 2 percent. The picture has not changed appreciably since then. This no doubt accounts for the IMF's statement that "external debt risks remain high, but under the EFF, external debt is estimated to remain sustainable given a sustained fall in external debt and strong commitments from bilateral official lenders."
During PTI's first year in power, before the staff level agreement was reached on 12 May 2019, which accounted for little if any programme (budget) support from multilaterals and/or bilaterals, the Khan administration increased reliance on domestic debt. Domestic debt stock as per the Economic Survey 2018-19 was 18,171 billion rupees by end March 2019 and "during the first nine months domestic debt witnessed an increase of 1754 billion rupees." In September 2018, a few weeks after the PTI government took over power total government domestic debt and liabilities amounted to 17,497.9 billion rupees while by September 2019 the amount rose to 23,164 billion rupees - a rise of 32 percent over and above the envisaged rise in external debt.
The IMF programme document uploaded on its website states that "as of March 2019, 57 percent of domestic public debt had a maturity of less than a year, up from 54 percent in June 2018....the annual risk in short term public debt has surpassed the upper risk assessment benchmark...the adjustment scenario envisages a re-profiling of short term debt held by the Central Bank, discontinuation of Central Bank financing and a gradual decrease of foreign currency denominated debt to reduce roll over and exchange rate risks." According to the recent Moody's report, "the government has already re-profiled a substantial portion of domestic debt from short-term treasury bills into longer-term floating rate bonds. This will reduce gross borrowing requirements to around treasury bills into longer-term floating rate bonds. This will reduce gross borrowing requirements to around 25 percent of GDP in fiscal 2020, from nearly 40 percent in the last fiscal year. The government is aiming to lengthen domestic maturities further and reduce its reliance on treasury bills and floating rate debt."
It is therefore external debt acquired largely during the Ishaq Dar years that is the major problem facing the economy today. Dar went on record to state that he was converting domestic debt to external debt as the rate of interest on foreign debt was much lower than on domestic debt - a massively flawed policy that independent economists warned him about at the time by pointing out that domestic debt is manageable unlike external debt and that no government can keep the rupee grossly overvalued indefinitely as it would begin to impact on exports. Significantly Dar made these claims during the then ongoing IMF programme with the then mission leader tacitly and on occasion overtly supporting Dar's flawed policies.
Are the current polices - (i) a 13.25 percent discount rate; (ii) undervalued rupee to the tune of 5.5 percent; and (iii) during the first quarter of the current year releasing only 8.8 percent of the budgeted amount under Public Sector Development Programme (PSDP), less than 2 percent budgeted for social protection, only 11 percent budgeted grants released and no subsidy releases - appropriate? Sadly, these policies are all geared towards containment of the current account and budget deficits but their cost in terms of shrinking productivity due to unsustainably high capital costs, with a consequent impact on exports as well as lay-offs, more expensive fuel which is fuelling inflation and with less than budgeted disbursements for PSDP the growth rate is being compromised by more than what was envisaged by the IMF/budget documents.
How does one resolve the threat posed by the heavy external debt repayments? The discount rate needs to be lowered by at least 2 to 2.5 percentage points, the rupee set at its market rate and not artificially kept under valued while current expenditure needs to be slashed as opposed to PSDP, subsidies and social protection - an existing expenditure plan which may contain the seeds of social unrest.
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