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January 11, 2015
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Mortgaging the future

Opinion

January 11, 2015

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The majority of the people of Pakistan are poor and live hand to mouth. Even then, most of them avoid taking a loan, fearing that they will be unable to service/repay it or are unwilling to mortgage the family silver, if any, to acquire it. The poor and lower middle class families struggle to avoid getting into debt by working overtime to generate some additional income or by depriving their children of proper food, clothing and shelter, a reasonable education and adequate health services . However, these people are unaware of the fact that, while they are going through the hardships of life in order to avoid incurring personal debt, their government is creating debt at an alarming rate to be paid by these very people and their next generations in one way or the other.
Learning no lesson from their past, both the PPP and PML-N governments have preferred the easy course of borrowing rather than undertaking the difficult task of structural fiscal reforms and implementing a strategy for export-led growth. The result is that in the last five years, public debt has more than doubled. In other words, these governments have borrowed – in a period of five years ening in FY14 – more than the total borrowing by all governments since independence.
In rupee terms, the outstanding public debt went up from Rs7, 835 billion at the end of FY9 to Rs16, 321 billion at the end of FY14. Translating it into a family situation, it means that a head of a family with four dependents carries on his shoulders debt burden of about half a million rupees created by the government even if he himself did not borrow a single penny.
We also know that a large chunk of money raised by borrowing or taxing the poor is spent wastefully by the government. A royal lifestyle of conspicuous consumption coexists with widespread poverty among the people. We are reminded of it every day by bulletproof vehicles in which government officials and their families travel, as well as the construction

and maintenance of palatial official residences/ rest houses/guest houses for the ruling elite.
We read news about the inauguration of multi-lane motorways on which the affluent people will drive their SUVs and modern airports where private jets would land comfortably. More hurtfully, the ruling class is busy siphoning off public funds through corruption and misappropriation and tucking them away in bank accounts, expensive real estate and flourishing businesses in foreign countries. There is equally blatant disrespect of the laws passed to contain public debt, which are flouted by the government with impunity.
In foreign countries where tax revenue and exports are elastic in relation to the nominal GDP, and growth in nominal GDP is driven more by output expansion than inflation, sustainability of public debt is determined in terms of debt-to-GDP ratio. Although that formula does not hold water in the case of Pakistan where inflation has been the main factor for increase in nominal GDP, and taxes and exports are inelastic in relation to it, the legislative branch of the government passed a law in 2005 – the Fiscal Responsibility and Debt Limitation Act – setting the upper limit for government borrowing at 60 percent of nominal GDP. This ratio stood glaringly violated on June 30, 2014 when it went up to 64 percent of GDP.
Similarly, the SBP Act was amended in March 2012 mandating that “the federal government borrowings from the Bank shall be such that at the end of each quarter they shall be brought down to zero”. But the Ministry of Finance and the SBP have violated this statutory provision also with impunity. Notwithstanding the provisions of the SBP Act, government borrowing for budgetary support from the SBP was allowed to increase steadily quarter after quarter from Rs1, 704 billion on June 30, 2012 to Rs2, 568 billion on June 30, 2014.
This provision was added to the SBP Act on the insistence of the IMF but the Fund has remained mum in its recent reports about the government’s violation of the provision. Additionally, it is now suggesting further amendments in the SBP Act, not realising that changes in laws mean nothing if they are not followed in practice.
These and other examples of violation of laws by the government sadly confirm that we are not a law-abiding nation, not only in the streets and businesses but in the prime minister’s and ministers’ chambers, government secretariat and the SBP headquarters.
At the end of June, 2014, 60 percent of public debt was domestic – taken mostly from the SBP and commercial banks. The way the central bank was manipulated by the Ministry of Finance, forcing it to conduct itself unprofessionally and slavishly, even a large part of commercial bank lending to the government got refinanced by it through its discount window.
The domestic public debt situation has had serious implications for the rate of economic growth, rate of inflation, stability of the financial system and solvency of the government. Pre-emption of bank credit by the government deprived the private sector of full access to credit, stifling economic activity, investment and economic growth. Excessive government borrowing fuelled inflation, which promoted misallocation of resources and retardation of economic development. It also contributed to the maldistribution of income and wealth, reduction in employment opportunities and increase in poverty.
The remaining 40 percent of the total outstanding public debt was owed to foreign governments and international financial institutions functioning under their control. The servicing and repayment of foreign debt requires availability of foreign exchange in addition to rupee resources. While the government has the ability to print rupees, it cannot print dollars. Accordingly, rising foreign debt had several additional implications.
Living from one balance of payments crisis to another, the PPP and PML-N governments mostly remained preoccupied with day-to-day firefighting. Trapped in the short-term problems of financing fiscal operations and covering foreign exchange deficit, and meeting meaningless IMF conditionalities to obtain more loans, neither of them adopted and implemented a comprehensive long-term development strategy to accelerate export-led economic growth and reform the regressive and unproductive tax system to generate more revenue. As the country could not afford to face a foreign debt default, and as its export growth was inadequate, the PML-N government borrowed more aggressively from abroad and preferred selling profitable national assets to foreigners.
As the level of outstanding debt exploded in the last five to six years, debt servicing began to eat away a large share of tax revenue and exports. It consumed 45 percent of the total tax of the federal and provincial governments and 27 percentage of exports in FY14.
There are many other grim aspects of the public debt situation that cannot be covered here due to space limitation. But the above review is enough to drive home the message that government debt and its servicing have reached a level where the budget and the balance of payments have become their hostage. If immediate measures are not taken for expansion of tax revenue through comprehensive tax reforms, a new strategy of export-led growth is not adopted and debt is not managed prudently, the country will get into a serious downward spiral from which it would find it hard to get out.
The writer is a former governor of the State Bank of Pakistan.
Email: [email protected]

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