Federal Finance Minister, Senator Mohammad Ishaq Dar, chaired a meeting on matters related to the Debt Policy Coordination Office at the Ministry of Finance the other day, where he emphasised the importance of prudent debt management for a growing economy. Referring to his article on Pakistan’s debt published recently, he said that the purpose of the article was to emphasise that Pakistan was properly managing its debt, on top of dispelling the impression that the country was at risk with regard to debt obligations in the foreseeable future. He assured, “As of today, external debt servicing obligations for Pakistan are not more than an average of $5bn per annum until 2021. Keeping in view the track record of the country, this amount of repayments should not raise any concern.”
Of course, the finance minister rightly said that some critics had blown up the issue into a doomsday scenario. But at the same time, he himself also downplayed the seriousness of the issue. In boasting about the highest ever reserves of $24 billion, he combined $19 billion in reserves held by the State Bank of Pakistan and $5 billion in reserves held by the private banks. But when it comes to external debt and liabilities, he draws a distinction between public debt and private debt. In his article, he stated that government’s foreign debt on 30th June 2013 was $48.1 billion. But he did not mention about other liabilities of $12 billion; as such the total foreign debt was $60 billion. According to the SBP website, Pakistan’s total external debt and liabilities as on September 30, 2016, was $74.6 billion. It gave the breakdown: Public sector debt $62.4 billion; public sector enterprises’ debt $2.76 billion; banks’ borrowing $2.95 billion; non-resident deposits 0.7 billion; private sector guaranteed debt $3.57 billion and the figure of debt liabilities to direct investors is $2.95 billion.
Of course, the most serious aspect of our dire economic situation is the growing debt that limits the fiscal space to invest in human development and infrastructure, as 60 percent of total revenues is allocated for debt servicing alone, leaving little for investment in social and economic development. The reason for piling up this debt is that we spend more than we earn, and we import much more than we export resulting in fiscal deficit and trade deficit respectively. In 1999, external debt and liabilities stood around $45 billion, and during Musharraf’s era from 1999 to 2007 there was no increase in external debt and remained static around $45 billion. However, the external debt increased from $45 to $62 billion, from 2008 to 2013 — an increase of $17 billion during PPP’s five-year term. The total external debt and liabilities on June 30, 2016, were $74.6 billion — an increase of $ 12.6 billion during the last three years.
The finance minister takes credit for building up $24 billion foreign exchange reserves unparalleled in the history of Pakistan, further claiming that it reflects sound economic management by the PML-N government. The question remains whether foreign exchange reserves have increased because of an increase in exports and decline in imports, or whether there is an increase in remittances from Pakistani expatriates? In fact, the exports as well remittances of expatriates have declined, and the present government resorted to reckless foreign borrowing through the IMF, issue of Euro bonds and domestic borrowing from the banks. It is common knowledge that there are always strings and conditionalities attached to the IMF loans such as reducing the budget deficit, increasing the capacity to generate revenue, downsizing and privatisation of state sector enterprises and further effecting increase in the prices of electricity and other utilities to balance the budget.
The IMF gave superficial assessment of the economy instead of suggestions for improvements. For example, in one of the reports, the IMF statement was silent on the stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the informal or underground economy and increase in income inequality and corruption. The problem is that public-sector enterprises continue to bleed, adding to the contingent liabilities that are kept out of the budgetary statistics. There is no improvement in the tax-to-GDP ratio while mega projects involving huge expenditure commitments are made by the prime minister. Circular debt continues to accumulate and the government budget financing is likely to be at the mercy of foreign funding and domestic bank borrowing.
In the above situation, the fake certificate of good health provided to the government by the IMF is helpful for more foreign borrowing to solve the short-term liquidity problems of the government, but adds to the long-term insolvency of the country. IMF touts that it helps recover the economies that are in dire straits, but in fact, it has the record of multiplying the problems of debtor countries. Its conditions of withdrawing subsidies, devaluation of currency and privatisation of prime national assets adversely impact the people and the state. Pakistan is already in the grip of foreign debt of $74 billion, and despite the rescheduling of the debt (passing on to the next generations), one day it has to be paid. If this trend continues, Pakistan would find itself in the vicious circle; and it would have to take more loans to pay back the old loans.
One has to agree with the finance minister that developing country needs to pursue high growth objective to enhance employment opportunities and reduce poverty, but it has to be within manageable limits. The rising debt results in an increase in debt servicing and leads to increase in fiscal deficit. Secondly, Pakistan would be constrained to abandon development projects and find difficulty in allocating adequate resources for defence. Thirdly, the US and the West may persuade the IMF to stop providing loans to Pakistan to force Pakistan stop working on nuclear and missile programs. Perhaps this is the objective of the big powers and its proxy the IMF, who can bring Pakistan on the verge of bankruptcy. To avert the economic disaster, the government must take measures to get rid of the dependency syndrome; it should show zero-tolerance to corruption, tax evasion, wastages and mismanagement in public sector enterprises.
The writer is a freelance columnist. He can be reached at [email protected]