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Lahore

January 30, 2017

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Public debt management in Pakistan

Fiscal policy is a tool a government can use to accomplish the goals of progress capably by keeping a balance between revenue and expenditures. Pakistan faces a fiscal imbalance because of two primary reasons: 1. The government’s diminished capacity to generate revenues in public sector and 2. Inability of state to reduce expenditures.

In addition to that, there is growing liability on debts government has incurred and the cost of debt servicing is increasing manifold putting more pressure on economy of the country with increasing interest rates and devaluation of local currency.

Unlike previous decades, Pakistan has funded the current fiscal deficit comparatively more via domestic borrowing. External borrowing has been on decline. But this domestic borrowing creates negative impact on local domestic financial sectors.

The available funds that could have been borrowed by private sector were taken up by government. Commercial banks found it less risky to lend to state instead of private sector. It impacted the small and medium enterprises badly who found it difficult to obtain capital from banks.

Public Debt in Pakistan: The effective management of debt is vital for evolving a sustainable and steady debt portfolio. It alleviates the risks of re-financing, variations in exchange rates and debt build up that can scuttle and obstruct economic growth. It is established fact that prudent debt consumption can lead to greater economic growth and benefits the government to achieve its public and development related objectives.

The absence of any prudent management of debts may impede economic growth with high debt-servicing cost leading to decreased expenditure on development. Pakistan is a developing country and it is important to manage its debts effectively to accelerate development, stimulate economic growth and bring fiscal reforms.

The government of Pakistan is determined to reduce the debt limit from current 605 to 50% of GDP in coming 15 years. Similarly, it is decided to reduce fiscal deficit to 4% by amending the statutory bill in National Assembly that will bring changes in Fiscal Responsibility and debt limitation act.

Domestic Debt of Pakistan: The domestic debt of Pakistan has three components namely:

 i. Permanent debt (medium and long term both), ii. Floating debt (short term) and iii. Unfunded debt (consists of numerous tools existing under the National Savings Schemes).

The outstanding domestic debt was increased from Rs1200 billion and was reported at Rs13399 billion in March, 2016.

External debt of Pakistan: The external debt and liabilities of Pakistan comprise of all debt in foreign currency incurred by both public and private sectors. It also includes all foreign exchange liabilities of State Bank of Pakistan (SBP). The external debt and liabilities stocks were recorded at $69.6 billion in March, 2016. The $55.1 billion was the amount for external public debt out of $69.6 billion mentioned above.

Servicing of public debt: The recent budget for Fiscal Year (FY) 2016-17 contained hefty amount of Rs10.33 trillion for debt servicing making it the main expenditure for the country’s next fiscal year. In FY 2016-17, Rs8.38 trillion has been ear-marked to repay domestic debt with servicing costing Rs1.24 trillion primarily for interest payments for domestic debts.

Moreover, Rs443.80 billion were allocated for foreign loans repayment with servicing cost of Rs113 billion. The public debt servicing is consuming almost 46% of total revenue in the current FY that was 45% in previous FY. If a government needs to spend more on development sector to reduce poverty and improve social welfare, this ratio must be below 30%.

Public Debt Risk: The surge in risking default on its debt was circulating in Pakistan after a report by Bloomberg. There was a surge of 56 basis points to 620 in Credit Default Swaps (CDS) that protect Pakistan’s debt from non-payment for 5 years during the international market sell-off.

This increase was the highest and sharpest since January, 2015 just behind Greece, Portugal and Venezuela according to Bloomberg. The 40% of outstanding debt will get mature in 2016 that is $45 billion. According to Mervyn Tang, lead analyst for Pakistan at Fitch Ratings Ltd:

“Pakistan’s high level of public debt, with a large portion financed through short-term instruments, does make the sovereign’s ability to meet their financing needs more sensitive to market conditions,”.

Pakistani authorities by improving growth rate, reducing inflation and limiting budget deficit can increase confidence among investors. While massive investment coming from China as part of China-Pakistan Economic Corridor would reduce the risk and panic among officials of government of Pakistan.

As per Ministry of Finance, Pakistan has not been under any threat of going to default as just $4 billion is payable in 2016 and faces no issue in servicing of debt. There is medium level of risk of getting default for Pakistan in coming 5 years as per assessment done by Bloomberg.

Fiscal Development in Pakistan: Pakistan faced multifarious problems regarding fiscal policy. Inefficient economic management coupled with low tax base and increased expenditures resulted in constant fiscal deficit. Similarly, the high dependency on domestic and foreign debts resulted in crowding-out of investment by private sector.

Prime Minister Nawaz Sharif and his team has taken concrete steps to stem the rising fiscal deficits since he took power in May, 2013. The $6.6 billion loan from IMF prevented balance of payment crisis. There was a decline in budget deficit from 8.2% of GDP in FY-2013 to 5.3% in FY-2015. This was because of government’s efforts to manage expenditures efficiently and by increasing tax revenues.

“Debt “sustainability” is often defined as the ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears.”

Pakistan faced numerous challenges i.e. large fiscal deficit, high levels of debt and reduced investors’ confidence. On the other hand, the external support was also reduced because of inability of government to service its debt obligations in the future.

Finance Minister Ishaq Dar recently said that Pakistan would no more rely on IMF and foreign debts and efforts are being made to avoid any future IMF programme.

Fiscal reforms: The significance and essential nature of debt sustainability demands corrective measures from government of Pakistan to improve public debt sustainability indicators and reduce the associated interest rate risks over its obligations. To achieve the objectives of lengthening debt maturity and refinancing of external debt, structural reforms should be taken immediately to boost growth that is cardinal for public debt sustainability.

Some other fiscal policy tools that are pre-requisite to improve growth rate are mentioned below:

1. Tax reforms: Tax is important source of revenue to finance development expenditures and public goods. Pakistan’s tax-to-GDP ratio (10%) is worst and falls at bottom 15 in the world economies due to tax evasion, small tax base and inefficiency of Federal Board of Revenue (FBR) to collect taxes. There is need to broaden the tax base by bringing more taxpayers into tax net and agriculture tax and property tax. Provinces should increase their tax collection too. Withdraw any tax exemptions or concessions to anyone regardless of his status. The Statutory Regulatory Ordinance (SRO) that allows exemptions must be approved by parliament and not by FBR officials.

There should be performance based reward system in FBR and focus should be places on human resource management by capacity building of tax officials. Government has started E-filing of tax returns and this process should be enhanced and promoted so that a physical contact between tax-payers and collector be avoided to reduce risk of tax evasion and corruption. The implementation of tax laws be enforced strictly to curb any leakage in tax collection.

2. Government expenditures: The effective operation of public spending is extremely important to generate employment prospects along with creating viable economic-growth. Steps to should be taken to avoid any unplanned and un-productive expenditures that are politically motivated. The prioritise committee in Ministry of Finance should investigate any duplication of projects. Remove any un-targeted subsidies that are rewarding the inefficient sectors. Improve business and investment climate by attracting more investment. The Implementation of Investment Strategy 2013-17 is extremely important to increase investment to GDP ratio by 20%. China’s $46 billion investment in CPEC would steer Pakistan to economic growth and prosperity. The corruption and leakage of resources must be stopped by appointing experts and professionals that are best for the jobs assigned to them.

Conclusion: There is no iota of doubt that efficient use of fiscal policy instruments mentioned above can effectively impact the economic path of country. Pakistan is soon going to complete the plan initiated and offered by International Monetary Fund (IMF). Its first time in the history of Pakistan that it’s going to complete the task set by IMF. Further, it is imperative for the government to embrace a unified methodology for revival in economy and reduction in debt to put country on a sustainable path of growth and progress.

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