Sunday October 24, 2021

The abyss is here

June 15, 2018

While briefing the caretaker power minister, the secretary of power disclosed that the circular debt stood at over Rs1000 billion. Of this a little over 500 billion is the liability carried forward from the numerous guarantees and payables by the government in multifarious private and public-private ventures – Karachi Electric being one. Others are simple roll-overs of the receivables and payables which have gone around unpaid shifting from one constituent to the other for lack of paying ability.

When the PML-N government assumed power, it began by clearing a Rs480 billion circular debt to kick-start the power and energy sector. These had accumulated over time because of the inefficiencies in governance and the power sector under the PPP.

This liability of Rs1000 billion is a dangerous figure. Here’s why: Pakistan’s total annual budget hovers around Rs5000 billion, and to remain a viable and functional economy its fiscal deficit – the difference between revenues and expenditures for a year – must not exceed five percent of the GDP. Usually, governments tend to overspend and rarely stick to the desired parameters. The 2017-18 figures of the deficit are expected to be around 7-8 percent of the GDP, far greater than the five percent imposed under a statutory limit. The one trillion of the power sector remains a hidden liability which when added to another one trillion included at the outset as a declared budgetary deficit makes a total budgetary deficit of some 40 percent of the budget, or 10-11 percent or higher of the GDP. This is red territory.

A ten percent deficit in the GDP equates to some $30 billion to keep the economy going as it is, without counting growth. Which really means that we make our annual budgets around a fiscal gap of some 60 percent even before we start. To make up for it every year the government needs to borrow, especially from foreign sources.

The local portion of the liabilities can be paid off by printing more money which fuels inflation while what we owe to external sources will need to create dollars. If creamed off the local market by the government it only makes the dollar dearer, bringing the rupee under stress – which only multiplies inflation even further. This is being played out by the markets even as we speak, and adds to the debt pile in rupees. Such incremental denudation of the money from the economy theoretically then may reach a point where the entire economy will stand mortgaged or sold out. So even as we slide down to the abyss we know it will be the abyss where it will stop. We are running on empty promises, false declarations and a virtually empty treasury. We are virtually bankrupt.

Such money cannot be had even from the best international buddies. One of them, higher than the mountains and deeper than the oceans, has just recently rebuffed requests for parking some of its spare liquid money in our banks even as a measure of goodwill. It was expected that around ten billion dollars for a fixed time to bolster Pakistan’s meagre foreign exchange portfolio would ease our balance of payment problem. Instead 500 million in cash, and another five hundred under some project head is the most we can hope for. There is talk that some regional friends may step in but that will entail a probable political and security cost, skewing Pakistan’s foreign policy preferences.

The FE in the economy comes with growth, exports arising out of such growth, and remittances from expat Pakistanis. Or from borrowing which has been the most common recourse for all governments. Pakistan is already busting its debt limits imposed in the constitution to restrict foreign dependence and around capacity within the economy to retire the debt. It is estimated that Pakistan would have borrowed around $100 billion by 2025 to keep buoyant. With a country as heavily in debt, it is only notionally sovereign. To retain some sovereignty and to avoid total bankruptcy we will need to begin immediate recourse to limiting the deficit to the statutory levels.

The PML-N government in its last five years added around $38 billion to the debt pile equivalent of the entire foreign debt of the first sixty years of Pakistan’s life. The principal reasons for such profligacy, per finance mandarins, included a culture of extraordinary allocations in the head of development funds to parliamentarians and extraordinary expenditure on big-ticket development projects. The routine expenditure in running the government in perks and privileges made up the rest. This culture of careless profligacy and possibly extensive graft in a laissez-faire approach has meant that Pakistan is on the verge of sinking. We were fed lies of economic miracles even as we were on our way to an impending abyss.

Pakistan’s ongoing predicament with inadequate electrical power, despite claims of addition of 11000 MW by the previous government, stem from the same inadequacy – lack of money in the treasury to buy electricity from the independent power producing companies. The circular debt finally lands at the doorstep of the government since major violators are mostly government agencies which are already heavily in debt and unable to pay. With no fuel to power the plants and no money to buy electricity, it is a shambles for both domestic and industrial consumers. The inability of the distribution system to carry anything beyond 18000 MW is another restraint. This despite a 35000 MW installed capacity in the country. It is actually a circus of the incompetent that has its entire nation by its vitals. Thermal plants retired by China for environmental reasons will now pollute Pakistan which will cost around 2-3 percent of the GDP in environmental costs. Wait for the slow death.

Between growth – which needs imagination and persistence, and complimentary policies – and cutting expenses by reducing the size of the government, and plugging holes as in the PSEs, the governments choose to borrow. Growth remains marginal and exports laggard while the economy remains caught in piling debt, devaluing the rupee, and an ever increasing import basket. The FE thus is leaking like a burst dam. To stem this haemorrhage, the rupee devalues further and we get caught up in this severely debilitating vicious circle without a clue to break it. This invariably inflates the economy. With little or minimal growth and escalating inflation, the economy stumbles into stagflation – no growth and high inflation. At which point poverty implodes and the society regresses. This adds to instability and social volatility.

Juxtapose this with how the international environment is evolving with the nuclear programmes of outlier countries such as North Korea and Iran in focus, and how the news emerging out of India – carried on wires but not yet officially confirmed – suggests that the US has invited it too to consider dispensing nuclear weapons; and it all begins to seem surreal. What succour can Pakistan, in doldrums because of an impending economic collapse, hope to find in the face of such diplomatic challenges can only be a matter of guess. Unless the home front settles and our economic challenges can find a sustainable resolution, the omens are grave. Even without the nuclear conundrum, we have our task cut out.

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