Pakistan’s total debt burden is becoming unsustainable by reaching over Rs24 trillion. The new prime minister should take notice and halt the blatant violation of Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005.
By appointing Miftah Ismael as his special assistant on finance and taking over the charge of the Economic Coordination Committee of the Cabinet (ECC) along with three committees – energy, privatisation and restructuring – Prime Minister Shahid Khaqan Abbasi apparently gave a clear message that he would virtually be the in-charge of financial affairs notwithstanding the important portfolio of finance that has once again been given to Ishaq Dar.
Insiders maintain that the serious economic issues, including burgeoning total debt burden and liabilities, declining revenues and decreasing foreign exchange reserves ($14 billion) were a test for the new prime minister. It is now to be seen if he would take notice of these major economic concerns and find solutions.
The conspicuous absence of Mr Dar, who abruptly left for Dubai, during the final political rally in Lahore speaks volumes about his reservations on various issues. It also shows that he may not be enjoying the unchallenging support and blessings of former prime minister Nawaz Sharif, as he used to during the Pakistan Muslim League-Nawaz’s (PML-N) last four years.
Economic and financial affairs of the state are turning serious. As the prime minister’s new special assistant on finance starts briefing his boss on the issues that should be taken up on priority, the seriousness of the affairs was being questioned in the relevant official and unofficial quarters. The government must address the problems to avoid collapsing of the economy that has suffered massively during the last 15 months.
There is growing realisation that the 60 percent limit of the FRDL Act was wrongly allowed to be crossed to reach over 66 percent. The government did not seem to be concerned with violating two percent of GDP limit set in FRDL Act for both rupee and dollar sovereign guarantees that had reached 2.4 percent of GDP (Rs800 billion of GDP) in June 2016. The country’s present sovereign guarantees stand at 2.7 percent of GDP against the limit of two percent.
This is happening for the first time in the Pakistan’s history that the Ministry of Finance has changed the definition of debt. However, the central bank continues to maintain its own definition that contradicts Dar. The finance minister’s prescribed definition is also being challenged by the independent economists including Dr Hafiz Pasha, Dr Ashfaque Hasan Khan, Sakib Sherani, Dr Salman Shah, and Shahid Kardar.
The State Bank of Pakistan (SBP) in its monetary policy announced on July 2017 gave the figure of total debt and liabilities (total debt stock both internal and external) as Rs24.148 trillion on end March 2017. While the ministry of finance put gross public debt as Rs20.9 trillion, a massive difference of Rs3.248 trillion. This is where the government is accused of manipulating figures by changing the definition of debt.
According to a source in the central bank, the definition of total debt stock is based on standard international definition and that they would continue to follow the pattern to speak the truth about the debt figures. The ministry of finance, however, comes up with its debt figure by not taking into account the liabilities without which experts maintain there cannot be certain verifiable debt stock figures. Why is there a difference between the SBP and Ministry of Finance’s debt figure? Is it for the consumption of the International Financial Institutions (IFIs) to show overall debt and liabilities on the lower side? Why is there difference of opinion within the two top organs of the government to arrive at a consensus over the debt figure? Does it have anything to do with figure fudging and manipulation of official economic numbers to mislead the nation as is often alleged by the government’s critics and detractors?
It is no more a secret that the government’s sovereign guarantees were increasing at a fast pace when it began to extend them for energy projects under China-Pakistan Energy Corridor (CPEC). The question being asked is why is the government extending sovereign guarantees to the private power sector companies under CPEC when it is not allowed under the law?
Finance minister Dar has at times admitted that part of the increase in debt is due to the IMF debt which had been taken only for balance of payment support, repayment of pending instalments due to IMF loan taken by the previous Pakistan Peoples’ Party (PPP) government in July 2011, and not for budgetary financing. He said his government repaid $12 billion of external debt till end July 2016, which was mainly related to the borrowings of the previous governments.
Nevertheless, now when things are getting out of control in terms of averting default on foreign loans, the government is being advised to immediately review its debt strategy by taking into confidence the central bank officials. It is unfortunate that the PML-N government is not taking the warning of independent economists and honest officials of the Ministry of Finance, central bank and the Economic Affairs Division (EAD) seriously to remove falsehoods about the total debt stock.
There is need for a strategy to contain it if not remove it, as was done by Turkey under the leadership of President Tayyip Erdogan. About 20 years ago, Turkish currency used to change on daily basis due to its bad economy, but things began to improve when its leaders took the issue seriously, which ultimately helped them get rid of their external loans. And despite unfavourable attitude of the US and the European Union (EU), Turkey is now poised to soon be among the top ten economies of the world.
The country’s total external requirements are $22.5 billion. The current account deficit is widening due to import of machinery and plants for CPEC projects, while total debt and liabilities are increasing at a fast speed. Nobody in the government is realising that tough times are ahead with no escape from a bigger economic disaster, if timely actions are not taken by the Abbasi administration, which needs to deviate from the previous policies to avoid the imminent debt trap.
One of the major reasons in the increase of debt is commercial borrowing, which is 25 percent of the external debt coupled with low returns on foreign currency reserves compared with the borrowing cost, which is another matter of concern.
The year 2018 is being termed as a crisis year when Pakistan will start making repayments including that of Chinese commercial loans which differ from project to project; still not fully known to the public. The debt relief given by the international lenders will end in 2018, and that is why the next year is being viewed as an important year.
The matter worsened when the central bank governor recently told a foreign news agency that he was unaware as to how much of the projected $46 billion inflow for CPEC was debt, equity and in kind. This was the precise question that was being asked by the economic writers from the officials concerned, but instead of an answer, they were told that the issue was still to be decided. The same was the answer of the director general of Debt Office at a National Debt Conference.
It happens rarely that the loan being acquired for any project does not show the amount of interest payment. However, in the CPEC projects, the government has always highlighted the amount and was reluctant to share the breakdown of the loan, equity and investment amount. It was like the liquefied natural gas (LNG) import deal from Qatar, for which the price and details are yet to be fully disclosed.
Independent economists have criticised Dar’s denials with regard to public debt management. The finance minister said the $25 billion foreign debt will not be sovereign in nature, and by implication, repayment of these loans will not burden the country’s balance of payments.
Many questions are being raised about the burgeoning debt. It is also being asked if this perpetual increase has to do anything with acquiring loans for development or for consumption. The fact of the matter is that the PML-N government, like the previous governments, has been recklessly borrowing with a view to meet the escalating budgetary deficit that amounted to Rs2.5 trillion up till 2015-16.
It is worth mentioning that the total debt was just Rs6.1 trillion in June 2008 which rose to Rs12.37 trillion as on August 31, 2012. This was exclusive of $7.4 billion payable to IMF that the central bank paid out of its foreign currency reserves. The PPP government in its five-year term added Rs6.7 trillion to the debt burden, which was a 103 percent increase. This outrageous increase was further augmented by the present government- the total figure as on June 30, 2016 soared to Rs22.5 trillion and eventually touched the monumental figure of over Rs24 trillion.
The debt situation turned serious when successive governments had to go for increased debt repayment that often consumed a major portion of the budget. The situation nonetheless aggravated during the last four years when the PML-N government borrowed $35 billion to manage its financial affairs. The ministry of finance does not agree with the figure and has termed it an exaggerated one but failed to offer any plausible reply.
Over the years, successive governments have continued to borrow more than expected to meet their roaring budget deficits. Now the question is whether it happened due to lack of prudent economic management or the failure was augmented because of the ever-increasing corruption. Should the people of Pakistan accept this phenomenon as a way of life which cannot be undone?
Additionally, state-run corporations are also haemorrhaging the national kitty with their Rs500 billion annual losses. It can be changed if the problems in the tax machinery are sorted out, perks and the huge budget of ministries, divisions, and PM secretariat and President House are curbed, while corruption and financial irregularities are also phased out.
The government should also stop rewarding tax evaders and money launderers with amnesties and instead provide tangible relief to the oppressed classes.
Government must also look into the issue of rising imports, which are now touching $52 billion compared to the falling exports that are now standing at $21 billion; making a mockery of the debt-management policy of the current government. Foreign exchange reserves minus $5 billion of commercial banks have gone down to close to $11 billion and could soon be slipping below the threshold of three months import cover either in the last week of this month or first week of September – a really frightening situation.
If Pakistan fails to qualify for World Bank loans that have to be equivalent to three months import bills, what would be the next step. The country is touching that border line as reserves have dropped by $4.2 billion and things are getting difficult due to reduced home remittances and problems in obtaining new foreign inflows.
Going forward, the new prime minister must deal with economic issues on priority before it is too late. In any case, seeking any other bailout package is becoming inevitable. It is now only a question of time. This government or the next government will have to knock the door of the IMF. How long do the rulers want to continue seeking foreign loans and making the nation poorer and poorer? How long do they plan on not being honest in dealing with the economic issues as a priority?
The writer is a senior journalist based in Islamabad