In a country experiencing high fiscal deficit, domestic debt from various sources generally moves upwards and Pakistan's case is no exception to this rule. According to the information revealed by the State Bank on 8th March 2011, the stock of domestic debt and liabilities has shot up by Rs 603 billion to a new peak of Rs 5.497 trillion as on December 31, 2010 as compared to Rs 4.894 trillion as on June 30, 2010.
A break-up of aggregate stock indicated that the entire increase was witnessed in the domestic debt which rose by 13.75 percent or Rs 640 billion to Rs 5.294 trillion while domestic liabilities posted a decline of 16 percent or Rs 38 billion to Rs 202 billion in December 2010. The tremendous rise in debt stock was primarily driven by a healthy growth in the floating debt which went up by 19.17 percent to Rs 2.859 trillion as against Rs 2.399 trillion in June, 2010, depicting an increase of some Rs 460 billion during the first half of 2010-11.
Floating debt includes three months' Treasury Bills and Market Treasury Bills for replenishment of cash. Permanent debt which includes market loans, federal government bonds, income tax bonds, prize bonds etc, also surged by 14.51 percent or Rs 115 billion to reach Rs 909 billion at the close of December, 2010. In addition, unfunded debt comprising national savings, postal life insurance and GP fund went up by 4.59 percent or Rs 67 billion to Rs 1.524 trillion.
The reasons for a steep rise in domestic debt and liabilities are not hard to explain nor is there a hidden formula to reverse such an ugly trend. Higher fiscal deficit, slow privatisation process and foreign inflows have left no option for the government but to rely increasingly on domestic debt to finance the mounting expenditures during the current fiscal year.
Rising defence and debt servicing expenditures coupled with less than target revenue collection have contributed to a higher fiscal deficit estimated at 2.9 percent of GDP during July-December, 2010 while financing from foreign sources has declined sharply mainly due to the suspension of the SBA with the IMF because of the failure of the country to meet certain conditionalities. In order to attract domestic resources on an increasing scale to fill the widening fiscal gap, the government has to pay higher interest rates on various categories of national saving schemes which compounds the problem further. The State Bank has consistently expressed serious concern over the ballooning of fiscal deficit and rising budgetary borrowings from it in the recent past but the government has not so far succeeded in its efforts to maintain a sound fiscal discipline. This has forced the State Bank to adopt a tight monetary stance in order to contain inflationary pressures in the economy within tolerable limits.
Debt servicing is already the largest single item of expenditure in the government budget and consumes more than half of the gross tax revenues. Obviously, debt servicing has now reached such a high level of current expenditures, and tax revenues have sunk to such a low proportion of GDP, that there is no manoeuvrability left with the government to effect improvements in the social sectors or to undertake vital development projects except through further resort to borrowings which, in any case, would be difficult to get and increase the debt burden of future generations for no fault of their own. However, it may be added that borrowing in itself is not good or bad. It is its use and level that matters the most. For instance, if the borrowing is used for building capital base of the country and increasing the productivity of the economy, it could generate enough income in future to pay back the debt as well as to leave a surplus.
However, in Pakistan, public sector borrowings have usually been wasted on unproductive expenditures with the result that the overall debt continues to mount without any visible productive assets on the ground. Keeping all the factors in view, it is imperative that a sensible debt management strategy is adopted on an urgent basis to address this growing menace. The main elements of such a strategy could include a major tax reform effort to improve the direct tax base, increase tax elasticity and improve tax equity and pruning of expenditures to the minimum so that reliance on debt could be reduced overtime.
Proceeds from the sale of national assets should also be used only for the retirement of expensive domestic debt and not wasted on additional expenditures. All of these measures would involve harsh measures and austerity by all and sundry. In our view, if a combination of such measures is strictly adopted, the country could get out of the present debt trap and further damage to its stability and sovereignty could be avoided. Those who think that it would be easy and painless to extricate the country from this difficult situation are definitely wrong.