In my preceding article on Economic sojourn 2014 to 2020 which was published in “The News” on September 9, 2020. I raised few concerns regarding the direction of Pakistan’s economy, highlighting the issue of the overall debt situation of Pakistan and concluded some recipes. Some of these policies which I have quoted then, “Pakistan must renegotiate its terms with the IMF (International Monetary Fund) in order to reduce uncertainty and vulnerability within the economy. The policy rate should be further slashed down to 3-4 percent to stimulate GDP growth and revive demand. Tax reforms should be implemented as per the TRC report submitted in January 2016. In addition to this, the government should reduce dollar parity to Rs140 through central bank intervention, and give direct subsidy to the exporters in rupees to compensate alignment of rupee dollar parity. Printing of notes should only be used for the economic development of the country, and governance issues should be addressed to control inflation”. At that instant, I was immensely criticised by then relevant quarters. Now, if we are looking at the current macroeconomic scenarios; Central government total debt swells to Rs38.69 trillion as of June 2021, rising at a rate of 10.23 percent as compared to June 2020. Whereas, domestic and external debt also rose to historic level of Rs26.33 trillion and Rs12.43 trillion, respectively. Without further ado, I am featuring the present scenario of debt profile by the end of fiscal year 2020-21 (FY21).
FY21 had the significance of being the year of Economic revival globally and in Pakistan. However, in the 3rd year of the current regime, it has seen revival with rising uncertainty. As the current government marks its completion of the 3rd year in power, it has been widely criticised for the economic vulnerabilities on the back of historic devaluation of domestic currency against greenback, alarming rise in current account deficit and rate of Inflation, hike in debt levels which has burdened the common man, and increased socio-economic inequalities that have further added to the woes and pushed the nation deep into crisis.
However, the prime minister and his crew kept on indicating to the mess they inherited from their predecessors. Considering that, we are wisely bygone more than the two third tenure of the incumbent government, now it is fairer to rattle on about what is done and what has not been done.
The government of Pakistan Tehreek-e-Insaf may have forgotten its own motto of emphasising more on macroeconomic stability providing more jobs and reducing the rate of inflation ahead of unsustainable consumption oriented growth. Heading more towards for growth instead of addressing fault lines in the economic paradigm, despite claiming of structural reforms. Average inflation rate has been 8.8 percent during the current regime vs 4.53 percent in the five years of the previous regime.
The economy is foundering by most economic indicators, highlighting the cost of expansionary policies without fixing the structural economic flaws. After the completion of the first quarter of FY22, current account deficit has already passed its annual target, and now stands at $3.4 billion (4.1 percent of GDP), while rate of inflation is at 9.0 percent due to souring import bills and hike in global commodity prices, respectively.
With that, historic rise in growth of remittances since the outbreak of pandemic is being offset by a sharp increase in the price of international oil. Eventually after being the best performing currency in less than six months, Pakistani rupee has now become the worst performer in the region, breaking out an all-time historic low in the ongoing month at 174.42 rupees against dollar.
With that being said, I will now move forward to analyse the overall debt situation of Pakistan till the end of FY21. Pakistan's debt has increased to unsustainable levels, and this has exposed the country to internal and external shocks. In addition to lack of reforms and inconsistent policies under the present regime, agreeing to the tough IMF conditions has had an adverse effect on the economy.
A revival in real GDP growth of Pakistan to the tune of 3.94 percent was recorded in FY21. This is probably due to a low base effect of negative growth of 0.48 percent in fiscal year FY20. It may be noted that large scale manufacturing sector, a sector which is always targeted to initiate growth momentum is still below its output level in the corresponding period of FY18, which shows no sign of growth. It stood negative of 4.52 percent.
With respect to the previous article, the methodology comprises of the average value of exchange rate, central government’s domestic and external debt taken and the devaluation effects working for the annual period during 2013-14 to 2017-18 (the former regime) and 2018-19 to 2020-21 (the present regime).
Under the previous regime, the gross average domestic debt per year remained at Rs1,379 billion mainly because of a low interest rate environment. As a result, due to low interest rates and higher tax revenue collection, fiscal deficit dropped to 6.5 percent of GDP by the end of FY2018 as compared to 8.2 percent of GDP in FY14. Whereas, under the present regime, gross average domestic debt per year has appreciated by Rs3,283 billion, which is 138 percent higher than the previous regime mainly due to a high policy rate. Fortunately, it was curtailed from 13.25 percent to 7 percent in June 2020; however, it seems that the damage has been done. Hence, in addition to the effect of interest rate decline seems to be reflected in the domestic debt, which decreased from Rs3,433 billion to Rs3,283 billion, simultaneously the fiscal deficit has clipped down to 7.1 percent of GDP from an alarming level of 8.9 percent of GDP in 2018-19 and 8.10 percent of GDP in 2019-20. Later in September 2021, the SBP decided to raise policy rate by 25bps to 7.25 percent to tackle down an overheated economy. With that done, it is necessary for Pakistan to root out such policies which are causing macroeconomic vulnerabilities.
Moreover, during the previous regime, the gross average central external debt per year grew by Rs661 billion during 2013-14 to 2017-18 mainly due to the concessional long-term loans utilised in structural reforms in the energy sector, infrastructure, China-Pakistan Economic Corridor (CPEC) projects, SMEs, taxation, and trade facilitation which had also enhanced the debt repayment capacity. Whereas, under the present regime, the gross average central external debt has grown by Rs1,546 billion or 134 percent higher versus the previous regime mainly due to a massive rupee devaluation of 23.89 percent in 2018-19 and 16.12 percent in 2019-20. Under the present regime, the total central government domestic and external debt grew by Rs14,487 billion or 60 percent from Rs24,211 billion (FY2018) to Rs38,698 billion (FY2021). Whereas, during the previous regime, the central government’s external and domestic debt grew by Rs10,204 billion or 72.84 percent from Rs14,007 billion (FY2013) to Rs24,211 billion (FY2018). However, on an average basis, the gross total central domestic and external debt grew by 137 percent to Rs4,829 billion in the present regime as compared to Rs2,040 billion during the previous regime.
Overall, Pakistan’s average exchange rate remained stable from 2013-14 to 2016-17. However, it dropped by 13.56 percent from Rs96.73/dollar during 2012-13 to Rs109.84/dollar during 2017-18, which had caused devaluation effects of Rs268 billion to the economy (average Rs53.66 billion). Under the present regime, the country’s average exchange rate has deteriorated by 45 percent from Rs109.84/dollar in 2017-18 to Rs160.82/dollar in 2020-21, which has triggered massive devaluation effects of Rs3,311 billion for the economy (average Rs1,104 billion). The average net of devaluation borrowing under the previous regime stood at Rs1,911 billion during 2013-14 to 2017-18, which has appreciated by 95 percent to Rs3,225 billion under the present regime. Whereas, the total net off devaluation borrowing during the present regime of three years stood at Rs11,176 billion as compared to Rs9,557 billion during the previous regime of 5 years. In terms of average stock of currency in circulation per year, under present regime it has grown by Rs840 billion versus Rs490 billion during the last regime.
Going forward, the government needs to realise that it is not sustainable to depend too much on foreign aids, debts, and remittances in financing of external accounts imbalances. Instead of that the government needs to take strong administrative and policy measures to identify main issues, and then resort to straightening out the economic hindrances. Due to the onslaught of conditions imposed by the IMF, the country's macroeconomic indicators are contracting the assertion of stabilisation. In concluding remarks, debt as a factor behind the uncertain economic situation has not been the focus of the present regime, as during previous governments, and one would have faith that this can be remedied.
The writer is a senior tax consultant