Public debts are a very useful tool by which governments can balance their budget in case their expenditure is more than their revenue. However, ideally this tool should be used only to borrow for development expenses, which creates infrastructure, ultimately generating resources to pay back the liability. These development projects, in addition to generating employment, promote economic growth thereby improving the citizen’s welfare. However, in Pakistan every government has been dependent on domestic and external borrowing to fund not only development projects but also the current revenue expenditure, which do not increase the repayment capacity of the country, but cause a permanent drag on the economy.
Pakistan is, unfortunately, one of those countries whose government expenditures have been more than their income since its infancy. From 1961 onwards, Pakistan could not balance its budget till 2016 — not even once. Leaders have been seen boasting about their feat of obtaining loans, calling it an achievement. Undoubtedly, initially, domestic and external funding was required without which Pakistan would not have been able to achieve economic growth. But, unfortunately, none of the governments made any serious effort to increase revenue by taxing the people judiciously. Since all governments have been on the weak footing, they could not afford to alienate the rich people and the feudal landlords by strictly enforcing the tax laws. Even the military governments could not make any headway and had to surrender to businessmen, especially traders with shutter-down power. Since initially loans were easily available from international finance agencies at very attractive rates, governments were happy to borrow to balance the budget instead of increasing their revenue.
The borrowing, euphemistically called assistance, has been done recklessly which in certain years crowded out the private sector. I would say that Pakistan is now suffering from “debt overhang,” which refers to a situation where the debt stock exceeds a nation’s future capacity to repay it. This is clear from the fact that we borrow further not only to repay the old debt but also borrow to repay the interest on the said loans. Actually, in none of the past or present governments’ five-year plans or Vison-2030 or Vision-2025, there has been any mention or method by which they plan to first balance the budget and then generate enough resources to pay back the loans.
Revised budget figures of 2015-16 are a typical example of how borrowing is being done. Federal government’s total disposable revenue, after giving share to provinces under the NFC Award, is only 2,481 billion rupees, which is sufficient only for markup of 1,315 billion rupees (53 percent of government’s total revenue), defence of 776 billion, pensions of 236 billion and subsidy to Discos and Pakistan Railway of 154 billion. These four items add up to 2,481 billion rupees. Lo and behold, the entire revenue of federal government is gone. Govt had to pay external debt installments of 318 billion rupees for which it borrowed to pay the old debt. That’s not all.
Another 1,793 billion rupees had to be borrowed to pay civil government running expenses of 340 billion, PSDP of 879 billion — one wonders how much was really spent on developing projects that enhanced revenue-generation capacity of Pakistan — and another 573 billion on grants and subsidies. In short, federal government could meet only 54 percent of the expenses from its own sources and the balance 46 percent by borrowing 2,109 billion. This is how the net borrowing of 4,798 billion increased in three years. Unfortunately, it is imminent that this trend shall continue.
July 13-March 16, government borrowed 4,798 billion rupees domestically and externally, whereas GDP increased by only 7,218 billion. On wonders what would have been the total GDP if these loans of 4,798 billion were not injected into the economy. Or if we are unable to get further loans, do we have a strategy for this eventuality? A plan B? I don’t think so. If the idea of a plan B where we are unable to get further loans did not occur to our government since 1960s, why should that happen now?
However, the current government has acted wisely by initiating the process of amending Fiscal Responsibility & Debt Limitation Act to restrict the public debt to 50 percent of GDP by June 2033. The current limit is 60 percent of GDP, but now total debts are around 65 percent of GDP, which is already in violation of the FDRL Act, but government wants to reduce it to 60 percent by June 2019. However, in the existing state of affairs of revenue-generation and our penchant to borrow even for petty projects (like planning to borrow millions of dollars for impact study of TPPT that our own textile sector can do very efficiently), it doesn’t seem probable.
A permanent tax expenditure that every government incurs every year is loss of revenue due to smuggling and under-invoicing of imported goods. PML-Q politician Haroon Akhtar is on record that goods worth nine billion dollars are smuggled in Pakistan. Custom duty and sales taxes evaded on these goods amount to 225 billion rupees.
Another permanent source of revenue leakage is the under-invoicing on imports from China, which, as per government’s own report, is around six billion dollars. Duty-evasion is around 150 billion. If government can plug these two loopholes, it can generate 375 billion rupees every year. NAB is also on record stating that there is a daily corruption of $133 million. Another NAB report places it 15 billion rupees per day. This explains that the economy has the strength and capacity to pay but it all depends on improving the system of governance in both private and government sectors.
Federal government budget states in the resource side the amount
rupees as Estimated Provincial Surplus. However, government of Punjab has not shown any amount as budget surplus. An amount of 300 billion-plus of circular debt has been parked at the Power Holding Co Ltd, which is not included in Domestic Public Debt, and interest being paid on these loans is recovered from consumers. In addition to this, another 300 billion-plus is stated to have been accumulated as circular debt. Sales tax refund owed by government is another 200 billion rupees. The total amount, made up of losses and unpaid bills of DISCOs and refunds, have to be ultimately paid by government. If it clears circular debt in June 2016 (as it did by paying 480 billion in June, 2013) what would be the fiscal deficit?
The total of External Debts & Liabilities and Domestic Debts on March 31, 2016, as per the State Bank of Pakistan are 20.941 trillion rupees (external debts converted are exchange rate of 104.755 rupees), and are increasing every year. This is going to continue keeping in view our track record unless (1) tax collections are increased (one factor current government has managed very well), and (2) all main political parties enter into some sort of Charter of Financial Management or Charter of Economy, an idea Ishaq Dar, the finance minister has already floated. It is imperative that this charter should be signed, sealed and delivered as early as possible.
The writer is president of Political Economy Watch, and he can be reached at email@example.com