Finance Division takes exception to news on ‘debt trap’

ISLAMABAD: Responding to a report carried by daily The News headlined "Debt Trap Haunts Pakistan’s Future”, the spokesman of the Finance Division said that the report has carried exaggerated numbers and incorrectly stated the facts which are misleading.

The spokesman went on to say: It is incorrect to assume that there is no serious discussion on public debt in the government, parliament or among political parties. Government’s efforts are reflected in the recently made amendments in Fiscal Responsibility and Debt Limitation (FRDL) Act which was approved by the parliament to maintain public debt levels within prudent limits. Accordingly, public debt shall be reduced to 60 percent of estimated GDP until 2017-18, and thereafter a 15-year transition has been set to bring down debt-to-GDP ratio to 50 percent;

The report incorrectly quoted debt numbers as at end September 2017 which are not yet compiled by any quarter. Total debt of the government stood at Rs.19,634 billion at end - June 2017 as opposed to blatantly incorrect number of Rs.25,0621 billion as mentioned in the report. Further, increase in total government debt was recorded at Rs.6,151 billion during last four years instead of Rs.9,000 billion incorrectly stated in the report. The rationale of using total debt of the government instead of total debt and liabilities has been clarified at many forums. Total debt and liabilities include the debt of other sectors (private sector, bank borrowing, etc) which are not part of total government debt since the government is not liable to pay these obligations.

Further it is incorrect to assume that current debt levels are a threat for Pakistan and its future without understanding the debt dynamics. It is important to note that out of total government debt, around 70 percent is denominated in domestic currency which is refinanced on need basis from the domestic market and government does not have any cause of concern with respect to domestic debt refinancing. External public debt increased from US$ 48.1 billion in 2013 to US$ 62.5 billion in 2017 i.e. by US$ 14.4 billion while non-public debt rose by US$ 7.3 billion during the same period. It is worthwhile to mention that official foreign exchange reserves increased from US$ 6 billion in 2013 to US$16.1 billion in 2017, a hefty increase of US$10 billion. Importantly, external public debt repayment obligations for Pakistan are in the range of US$ 4.0 to 4.5 billion per annum in the medium term. Keeping in view the track record of the country, this amount of repayments should not raise any concern as Pakistan has successfully met higher repayment obligations even with much lower volume of foreign exchange reserves. Furthermore, external inflows are expected to be sufficient to meet repayment obligations.

It is to be noted that the debt burden is better understood in comparison to its relation with the GDP instead of absolute debt numbers. The government debt was as high as over 100 percent of its GDP at the end of 2001 while it is now around 60 percent during last 15 years. Another way to gauge the increase in public debt burden of the country is to compare that with relevant global debt statistics. In this regard, Pakistan witnessed a marginal increase of 1.4 percent (from 60.2 percent in 2013 to 61.6 percent in 2017) in its total debt to GDP ratio during last four years while during the same period global debt to GDP ratio increased by about 8 percent (Source IMF World Economic Outlook). The table below shows the summary of debt to GDP ratio of few developed and developing economies:  

It is evident from the table above that developed countries like USA, UK and Japan also carry debt and maintain levels as high as 80 to over 100 percent of their GDPs, well above Pakistan debt to GDP levels. Even in the developing country peer group, Egypt, Srilanka and India carry higher debt to GDP levels than Pakistan. There is a need to understand that Pakistan is a developing country which needs to pursue high growth objective to expand its capacity and maintain its competitiveness. The other option is to stifle growth by curtailing development expenditures that can in turn have socio economic implications.

The past four years of the present government have seen impressive economic growth whereby the size of the economy grew from USD 225 billion in 2013 to USD 304 billion in 2017 thus constituting an aggregate growth of 35 percent during the said period. This was only made possible by the prudent policies of the government that included historically low domestic interest rates, a prolonged and sustained period of low inflation and price stability, significant surge in private sector credit, huge increase in PSDP spending and above all an effective monetary policy coupled with a judicious fiscal policy that saw the budget deficit come down from 8.2 % in 2013 to 5.8% in 2017. It is inappropriate to cherry pick the selective debt numbers and present them in isolation without giving the reader a proper perspective and a complete picture of the economy.  

With regard to the observations in this particular report on FBR’s weak administration, non compliant taxpayers and undervalued rates on sale and purchase of property, It is to mention that to promote the tax culture and dispel the general impression about escaping taxation by individuals having prominent positions in society, FBR has under taken the following initiatives: Tax Directory of Parliamentarians; Establishment of Financial Investigation Cell; Campaign against Tax Evaders.

Directorate of Intelligence and Investigation, FBR, is also striving hard to check tax evasion on the part of high net worth individuals like players, politicians, actors, etc.

Similarly, to check tax evasion, FBR has introduced withholding taxes U/s 236 C and 236 K of the Income Tax Ordinance, 2001 on sales/purchase or transfer of immovable property wherein differential withholding tax rates for filer and relatively higher rates for non filer are in place. Moreover, in order to arrest the under valuation of property, FBR has switched from DC (Deputy Commissioner) rates to FBR’s notified rates for the purpose of valuation U/s 68 of the income Tax Ordinance, 2001. FBR’s property rates are much higher than DC rates and it has been decided to gradually increase FBR’s notified rates every year to reach at par with actual market rates. This exercise is supposed to be completed over a period of three years. Consequently tax evasion in this sector will be checked.

Ansar Abbasi adds: Firstly, the “blatantly incorrect” figure of total debts and liabilities- Rs 25,0621 billion- as seen by the finance ministry was quoted by this correspondent in the story from the State Bank of Pakistan’s report still available on its website. Secondly, while the finance ministry questioned the rational of “total debt and liabilities”, but it conveniently ignored that the previous figures quoted in the story were also that of “total debt and liabilities” of those very years. Thus neither the exaggerated figures were reported not there was any “blatant incorrection” in the story.

In order to justify the increasing burden of debts and liabilities on the country, the finance ministry referred to the examples of some developed countries. However, the fact is that Pakistan pays almost 1/3rd of its total annual budget as “interest” on local and foreign debts. Additionally, during the recent years the finance minister itself has been repeatedly saying that it was getting the IMF loan only to repay the old debts i.e. we get the loan to repay the loan.

On the issue of tax evasion, the finance ministry says that the FBR is striving hard to check tax evasion whereas the fact as reflected in The News story remains that tax of hundreds of billions of rupees are annually evaded with the facilitation of the government authorities as sale and purchase of properties are made on highly undervalued rates determined by the government itself to favour tax evaders.

The News stands by its story.