Third Pakistan Prosperity Conference: Ex-SBP chief stresses ‘reform agenda’ to tackle growing debt issue

ISLAMABAD: In order to qualify for debt relief on ballooning external debt of $128 billion from multilateral and bilateral creditors, Pakistan will have to enter into the fresh IMF programme with crustal clear “reform agenda”. 

Former Governor State Bank of Pakistan Shahid H Kardar shared the whole bifurcation of numbers of external debt from all avenues and said that 48 percent of the debt owed to multilateral, bilateral debt including China possessed 31 percent, and the remaining 20 percent debt owed by the private sector. “Forget any debt relief with the approach of status quo” Shahid H Kardar warned and added that the question would be sharing the pain equitably among all segments of the society as there would be no free lunch but if the behaviour did not change then nothing would happen.

Kardar’s advice came up during a day-long conference 3rd Pakistan Prosperity Conference organised by the Policy Research Institute of Market Economy (PRIME). The former Governor SBP Shahid H Kardar presented a paper titled “Prospects for Debt Relief” where he suggested the need for a set of fair rules for the cost of lending to each participant/category of creditors. He said that debt restructuring was quite complex as there was no shortcuts and no quick fix. With 30 low-income lending were not fully transparent as so far Chinese opted to roll over repayments when they became due (around $8 billion) but they were reluctant to accept losses on their lending portfolio. Another complication is how to categorize a Chinese lending institution or commercial. While citing AidData China’s funding to Pakistan was standing at $70.3 billion until 2021 (only 2 percent was in the form of grants). The average interest rate on loan was 3.72 percent with an average maturity period of 10 years with a grace period of roughly 3.74 years, he added.

The share of energy-related loans was 40 percent and budget support 30 percent as “Rescue Lending” but a set of loan repayment safeguards from China was not available, he added. Shahid H Kardar said that there were similarities marked with fiscal indiscipline, massive dole out on account of tax exemptions, subsidies, incomplete IMF programmes, building of foreign reserves through borrowing and central bank-supported fiscal indiscipline as in our case through injection of Rs 12.8 trillion or 12 of GDP.

Dwelling upon global initiatives on debt relief, he said that there were some proposals that the Multilateral Development Banks must participate in arguing that debt relief requires the participation of multilateral and private creditors to share the burden on an equitable basis under the framework of debt sustainability analysis by the IMF.

In such a scenario, he said that the IMF’s increased quota can help supplemented by deferment of its charges while multilaterals like WB, ADB and others would have to take a haircut to increase their equity. The bilateral will have to take swaps and commercial lenders.

On domestic debt, he said that the banks being the largest lenders to a bankrupt borrower will have to bear the burden of some pain. He suggested adoption of a gradual approach and the imposition of a hefty withholding tax to prevent large cash withdrawals. He also made it crystal clear that the debt relief would be directly linked with home-grown agenda whereby no additional projects in the Public Sector Development Programme (PSDP), abolish projects where less than 25 percent expenditure incurred, reduce the footprint of state in the economy, address trust deficit, phase out heavy protection for motor vehicles, cement, sugar, polyester etc., rationalize import tariff structure, revamp tax structure, bring all incomes in tax net including retailers, wholesalers, light taxation of capital gains in real estate, doing away with price distortions, re-negotiating with IPPs and reduction in external debt may need to be complemented by capital controls and import restrictions.

The former governor also asked for rationalizing government’s expenditures reducing overstaffed federal government by undertaking right sizing in line with the 18th Constitutional Amendment, winding up of several agencies and autonomous organizations, retiring those who have completed 30 years of service and protecting pensions, entitlements etc and if its politically difficult then put them in a surplus pool as it would save on rent, utilities and cars.

There is a need to surrender all vacant posts and all such positions and similar exercises must be conducted at provincial levels, revisit defence strategy, and frameworks-shed non-core and commercial activities, prune size of allocation on commercial forces (3/4th of pension allocations on them) and other non-combat expenditures.