Undoubtedly Pakistan is in a deep economic and political crisis - its multiple dimensions are disastrous and suggest a bleak future for democracy unless remedial measures are taken urgently. In the wake of what a newspaper's headline termed 'Hurricane Mirza shakes up political landscape,' it has become obvious that political elite and establishment in Pakistan are incapable of running the country in a responsible manner.
Motivated by self-interest they are pushing the State towards another debacle - learning no lessons from history, especially what culminated in the form of dismemberment in 1971. In Karachi, carnage, perpetual and painful, testifies to apathy of those who matter in the land of the Pure. Besides, it indicates the direction - path of self-annihilation - they are pushing the country on.
The rulers in the face of these incontrovertible facts are insisting that "all is well" - or conveniently shifting blame of their incompetence and wrongdoings on "hidden hands" as usual. For example, in the face of growing debt burden coupled with all other negative economic indicators, the Prime Minister and his financial team have the audacity to claim that "economy is fast recovering". Reacting to it, Dr Ashfaque H Khan has very rightly pointed out in his columns that "what the prime minister needs to understand is that the economy can never recover under heavy debt. Recent examples include the USA, UK, Spain, Japan and Poland as these countries have sustained a large budget deficit in the range of 8% (Japan) to 10% (USA) of GDP and now experiencing serious debt crises with economic growth nearing almost zero. The Prime Minister must understand that Pakistan's economy will recover if and only if, the government maintains financial discipline and pursues a sound fiscal policy for an extended period of 3-5 years".
We have pointed out time and again in these columns that the government is least pushed to devise a strategy for emerging out of this 'debt prison'. Dr Ashfaque in his article, Deficit, debt and growth, presents the following worrisome facts about Pakistan's debt scenario:
-- Public and external debts have grown over the last four years at a pace never witnessed in the country's history hitherto. Public debt (both rupee and dollar components of debt) has increased at an average rate of 22% per annum in the last four years (2007-11) as against an average rate of 6.6% per annum during the first seven years (2000-07) of the previous decade.
-- Within the public debt, it is the domestic debt that has grown at a faster pace (23.4% per annum) than external debt. For Pakistan, the extraordinary surge in domestic debt is more worrisome because it is relatively more expensive. Interest payment has emerged as the single largest component of budgetary expenditure, of which the interest payment on domestic debt accounted for over 90% of the total. Persistence of a large fiscal deficit and decline in external flows has forced the government to rely heavily on domestic sources to finance the budgetary gap in recent years.
-- Within the domestic debt, the composition of debt has witnessed considerable changes in the last four years. Medium-to-long term debt has been converted into short-term debt with serious consequences for the government's debt management. Today, more than one-half of the domestic debt (Rs 3.0 trillion) is of short maturity, which must be rolled over at least once a year.
Even more worrisome is the fact that the bulk of short-term debt is shifted to the shortest end of the maturity (3 and 6 months). Such a situation is making the government more vulnerable to exploitation by the commercial banks. It has exposed the government to roll-over and the interest rate risks. The government will have to refinance as well as reprice the entire stock of short-term within one year.
-- Pakistan's external debt and liabilities (EDL) have reached $60.1 billion by the end of June, 2011.
-- The country has added almost $20 billion in EDL in the last four years. Had it not been for the suspension of the IMF programme over the last year, Pakistan could have added another $3 billion in debt. The structure of Pakistan's EDL has undergone considerable changes in the last one decade. The share of bilateral debt has declined while multi-lateral debt has increased during the decade which indicates that Pakistan's dependence on the latter has increased during the period, particularly in the last four years.
-- Many factors have contributed to the recent surge in debt, prominent among them is persistence of large fiscal and current account deficit (6.3% and 5.4% of GDP on average respectively), sharp depreciation of exchange rate and unrestrained borrowing with pride and pleasure. The depreciation of exchange rate has added almost Rs 1200 billion or 22% to the increase in public debt alone. It is horrifying to note that after 60 years of existence, the stock of public debt stood at $4.8 trillion but the country added Rs 5.8 trillion in just four years to reach a staggering figure of $10.6 trillion. Put differently, a journey of 60 years has been more than equalled in just four years.
In our column (Exit of SBP Governor, Business Recorder, 22 July 2011), we mentioned that "Shahid H. Kardar, during his short tenure as Governor of State Bank of Pakistan (SBP), was highly critical of wasteful expending and plundering of public money by vested interest ruling Pakistan. He was asking the government to devise a sound strategy as well as short-term and long-term plans to counter the menace of growing debt burden and abide by the Fiscal Responsibility and Debt Limitation Act of 2005.
In the current year, when the cost of servicing the domestic debt jumped by Rs 32 billion beyond the target of Rs 621.6 billion, the State Bank, under the leadership of Kardar showed concern and without mincing any words observed that the maturity profile of domestic debt reveals that the government has to rollover the entire stock of Rs 2.9 trillion of short term debt at least once a year. Any surge in credit demand from other sectors of the economy could elevate rollover risk and could also expose the government to interest rate risk."
The stance of Kardar irked the rulers. The rulers of the day have demonstrated persistent disrespect towards rule of law. They suffer from insatiable greed - rampant corruption, apathy towards the poor and needy, inefficiency and incompetence, just to mention a few. The word 'austerity' is not in the dictionary of politicians in power, high-level civil military bureaucrats and public office holders. The habit of living beyond means - our national addiction - has made Pakistanis a nation with the beggar's bowl. When the foreign lenders see the lifestyle of our ruling elite, they immediately show indignation - it is hard to believe for them that the rulers of a nation living on borrowed funds have such flamboyant ways of spending.
Kardar, a man of integrity with a keen analytical mind and an excellent grasp of the economic problems facing Pakistan, brooks no nonsense and therefore it was only a matter of time before he would do the honourable thing and quit. He showed dignity and till today has not issued any public statement in a cheap way as has been done in the past by many. It is not just a matter of personalities in any way - though honest and competent people are required in any case. We need institutions and consistency in policies to deal with the present economic mess - created by incompetent military and civil rulers like since 5 July 1977 in the wake of the coup d'état against an elected government by General Ziaul Haq.
Our total debt - both foreign and domestic - is increasing at an alarming rate and becoming unmanageable due to callousness of the rulers. The government is continuously borrowing heavily to meet its burgeoning budgetary deficit - it is feared to cross Rs 1.5 trillion this year, more than our total tax collection. About 54% of the total rupee-denominated debt is now short-term, up from 34% in June 2008. The shorter maturity of the debt means that the government needs to constantly refinance the debt and is exposed to sudden shifts in interest rates, which increases the cost of servicing the national debt.
Today's Pakistan represents a State where a trio of corrupt civil-military bureaucrats, crooked politicians and profit-hungry businessmen is very affluent, but the Government is on the brink of bankruptcy. This state of affairs is the direct outcome of State's policies allowing a free hand to forces of loot, corruption and terrorism. No other State in the world has undergone such a horrible experience. Clearly, Pakistani rulers have destroyed the State through favouritism, nepotism, corruption and incompetence.
The best example is that of Debt Policy Co-ordination Office, established under the Fiscal Responsibility and Debt Limitation Act of 2005, which is in an utter mess. Under the Fiscal Responsibility and Debt Limitation Act of 2005, it was the duty of the Debt Policy Office to ensure effective management of debt control by formulating a strategy for reducing it. On the contrary, this office has allowed public debt to grow by 88% in three years and severely shortened the average maturity of the debt.
The debt office delayed the scheduled auction of Pakistan Investment Bonds, a source of long term debt, and that increased the short-term debt," noted with concern by Dr Ashfaque, former Director General of the debt policy office. All the leading economists have been constantly asking the government to tighten its belt and give due attention to generating revenues, but it is least bothered in heeding their advice.
One of the major weaknesses of governance in Pakistan is unchecked wasteful spending and unwillingness to collect taxes from the rich and mighty. The worsening plight of the poor is not due to scarcity of resources - as propagated by the rulers to shift the blame on others - but is due to wasteful expenses on the part of the rulers and their mediocre bureaucracy.
Wasteful spending out of taxes collected from the poor and unwillingness to harness the real potential of Rs 8 trillion by taxing the rich is playing havoc with economy as well as the socio-economic fabric of society. Behind the present chaotic socio-economic and political situation in Pakistan, amongst other factors, is an ever-widening gulf between the rich and the poor. It is shocking that with every passing day more and more people are being pushed below the poverty line - their total number is now not less that 65 million in a country where rulers unashamedly waste billions of rupees on their personal comfort and in the name of security.
For the financial year 2011-12, a cursory look at the Annual Budget Statement reveals a disturbing story. Analysis of two sizeable volumes, prepared and published by Finance Division, Ministry of Finance, commonly called the "Pink Book", shows how public money is wasted on unproductive, unnecessary and monstrous federal government offices when millions of people are homeless and starving.
It is indicative of the priorities of our rulers. They are spending lavishly by borrowing more and more money. The figure of foreign debt is going to be US $75 billion in 2015 and that of domestic debt Rs 8 trillion. Both external and internal debts are increasing at a frightening rate.
The way we are managing our resources (not exploiting them or wasting mercilessly those already available) is criminal and is leading us to self-annihilation. Fiscal deficit of over Rs 1.5 trillion is expected during the current fiscal year. This testifies to bankruptcy of our political leadership and economic managers, who keep on relying on an incompetent and corrupt bureaucracy - FBR's fiasco of the 'budget exceeding' drama testifies to it.
They always take the flight to Washington when things go out of hand. The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth is showing its impact in all spheres: the political culture of changing loyalties continues, nation is in high despair and all sectors of economy are showing horrible indicators. In this bleak scenario, neither our political leaders nor technocrats dominating the Finance Ministry have definitive plans for coming out of these crises.
All said and done, nothing will change in Pakistan unless the rulers start living within the means. Unashamedly, they are not ready to surrender the extraordinary perks and privileges enjoyed by them at the cost of the taxpayers' money. In a democratic set-up, responsibility towards people who vote for parliament and accountability are interconnected.
The concept of modern egalitarian State emerges from the sovereign right of the Parliament to levy taxes (Article 77 of the Constitution of Pakistan). But at the same time it has to spend the same for public welfare rather than for personal comfort and self-aggrandisement. The second part of democracy is completely missing in Pakistan.
When half of the population of the country is facing malnutrition, the shameless indulgence of rulers and bureaucrats in wasteful expenditure continues unabated. Look at their gaudy lifestyle at a time when people are committing suicide due to starvation and unemployment.
The grim truth of Pakistan is the tendency on the part of the rulers and their lackeys to indulge in self-deception by relying on foreign masters, self-praise and self-perpetuation during critical times without realising how disastrous these acts can be. This is certainly a ruinous and suicidal path. We cannot come out of debt-enslavement, which is the main cause of our subjugation, unless we first become an economically self-reliant nation.
For this, the President, Prime Minister, ministers, parliamentarians, heads of political parties and high-ranking government officials would have to take the first step by living at very modest levels, start paying their taxes, repatriate all their foreign assets and then mobilise the masses for a nation-wide struggle to take the great economic leap forwards.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences.)