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October 29, 2018

Facts about public debt

Top Story

October 29, 2018

A lot of rhetoric by the incumbent government has been flashed publicly through the media about the public debt, perhaps to divert the public attention from their incompetence, mis-governance and anti-public policies which all is quite visible in the first seventy days in office. It needs to be understood that for any government, there is an opening figure of public debt to which is added in its tenure the amounts of yearly budget deficits along with the conversion loss on foreign/external portion of public debt due to devaluation of Pak rupee in such period. As the said budget deficits are duly approved by the Parliament, the whole process is transparent and is the responsibility of the Parliament and there should be no hidden surprises for anyone.

When the PML-N government started its term in June 2013 with Mian Muhammad Nawaz Sharif as Prime Minister, it inherited multiple challenges like large fiscal deficit, rising debt burden, unfavorable balance of payments, low foreign exchange reserves, poor growth in tax revenues, a shrinking tax-base, swelling current expenditures, a gigantic circular debt, which was unraveling the energy sector, flight of capital, weakening exchange rate and perilously declining investors’ confidence. On the external front, the major development partners had virtually ended their support on the face of a rapidly weakening economic indicators and apparent inability of the country to service its external obligations in the near future. One of the main challenges was absence of external financing which was causing turbulence in the domestic exchange markets and shifting the composition of public debt towards domestic debt, and that too into shorter maturities creating vulnerabilities and entailing high rollover and refinancing risks. State Bank of Pakistan (SBP) forex reserves, which stood at $6 billion in June 2013 fell to $2.8 billion in February 2014 as concerted efforts were made to destabilise the economy by market speculators, which was fueled in no less a measure by an irresponsible statement by an MNA of PTI, who had the audacity to claim around September 2013 that the exchange rate would soon climb to Rs127 to the US Dollar. It was a highly precarious, volatile and explosive situation to steer the economy and stabilise the external account.

In early 2013, there were predictions that the country would default on its sovereign obligations if necessary steps to avert the situation were not taken. These predictions were made by the financial experts, who had analysed the macroeconomic situation prevalent at that time and reached the conclusion that the country would not have sufficient external resources to meet its obligations of external debt falling due beyond February 2014. There was a dire need for stemming the depleting reserves and stabilising a fast depreciating currency, which touched around Rs111 to US Dollar in November 2013 as it was fueling inflation and raising the cost of debt servicing. The importance of lengthening the maturity profile of domestic debt became inevitable while maintaining interest rate stability and regaining growth momentum was also required to counter the impact of indebtedness.

Instead of playing to the gallery and blaming the previous PPP government, on assuming office in June 2013, the PML-N government immediately got down to rescue work and took necessary steps to avoid default, restore fiscal discipline, stabilise a collapsing economy and lay the foundation of accelerating growth. PML-N government introduced structural reforms with stabilisation measures within few days in its first Budget for 2013-14.

The PPP government had entered into a front-loaded Stand-By Arrangement (SBA) with International Monetary Fund (IMF) in 2008 with a total loan of $11.5 billion but left the programme after receiving an amount of $7,455 million against implementing first four of twelve phases of structural reforms due to its inability to implement the remaining agreed economic reforms. Out of the said PPP loan, PML-N had to repay $ 4.6 billion in its tenure and therefore entered into an Extended Fund Facility (EFF) with the IMF, agreed in July 2013, with an estimated amount of $6.4 billion leaving a net-intake of IMF loan of a meagre $1.8 billion in its tenure. Yet for the sake of economic stability and restoring fiscal discipline, the PML-N completed the entire reforms programme with commitment and diligence to enable Pakistan to restore its lost credibility in the community of nations as well as re-enter the international capital markets after an absence of around seven years. Simultaneously, other International Financial Institutions (IFIs) were re-engaged to obtain highly concessional foreign resources through policy loans as they had suspended business with Pakistan due to the macroeconomic instability which was prevailing in Pakistan in early 2013.

A number of politically motivated voices are raising doubts about the economic achievements of the PML-N government and particularly misrepresenting the nation, either due to lack of knowledge or purposely, about total public debt accumulation in the country during last tenure of 2013-18 of PML-N. As per ‘Fiscal Responsibility and Debt Limitation Act’, the Total Public Debt is defined as the Debt of the Government (including the Federal and Provincial Governments), less Government Deposits with the banking system, serviced out of the Consolidated Fund and the debts owed to the IMF. The inclusion in the total public debt of liabilities relating to private sector’s external debt, PSE’s debt, commodity operations’ borrowing and inter-company external debt from direct investor abroad is not as per law as these payments are not to be made out of the said Consolidated Fund with the State Bank of Pakistan. Therefore, the figure of Rs. 30,000 billion quoted by the incumbent government as total public debt as on 30th June 2018 is factually incorrect and the correct figure is Rs. 23,051 billion as per detail below. It is important to put the record straight as per the law of the land.

Musharraf’s government 1999-2008 increased the total public debt by 97%, in PPP’s tenure 2008-13 it increased by 153% and the increase in PML-N’s tenure 2013-18 was 71%. However, in first four years of PML-N tenure to June 2017, the increase was barely 46% (Rs6,177 billion) for the simple reason that the PML-N government had imposed strict fiscal discipline and undertook a number of real austerity measures including abolition of discretionary funds of the prime minister and the ministers.

The increase in total public debt during the year 2017-18 was Rs. 3,416 billion of which Rs1,978 billion was external debt. What happened this year, which saw an increase in debt from Rs19,635 billion to Rs23,051 billion, or from 46% to 71%, was very unfortunate, as prime minister Nawaz Sharif was disqualified from office and the author relinquished the charge of Finance Ministry in November 2017. PML-N’s new Prime Minister Shahid Khaqan Abbasiand his economic team had to face huge unbudgeted financial demands and consequently the economic discipline that was so painstakingly nurtured and preserved in the previous four years could not be maintained.

World over, the public debt is not quoted in absolute numbers but is referred to as a percentage to the GDP which is more meaningful in economic context. GDP growth generally co-relates with enhanced public debt and Pakistan’s GDP grew from Rs22,386 billion in June 2013 to Rs34,397 billion in June 2018. Total public debt to GDP of Pakistan was 60.1% in June 2013 which rose to 61.4% by June 2017 and 67% by June 2018 due to additional extra-ordinary security-related expenditure for war against terrorism (operation Zarb-e-Azb) etc and heavy investment in Public Sector development projects with clear focus on elimination of gas and electricity load-shedding from the country, improving highways transport, information technology and communication sectors. Incidentally, in 2018, public debt to GDP of USA is 106%, Japan 221%, Italy 138%, Belgium 115% and Singapore 105%, which all are far too above that of Pakistan.

One must remember that despite PTI’s political ‘Dharnas’ spread over months and submission of resignations of its members of the National Assembly in order to derail the democratic system which caused a lot of damage to the economy and the investors’ confidence, PML-N in its tenure, with Allah’s Kindness, achieved an increase in the federal taxes collection by 100%, enhanced GDP Growth from around 3% to 5.8% (highest in 13 years) and managed lowest inflation, export re-finance/long-term finance facility/lending policy rates in the last forty years in addition to an increase in foreign remittances from $13.9 billion to $19.4 billion, stable exchange rate and rise in national foreign exchange reserves from $7.5 billion in February2014 to $21.4 billion by 30th June 2017, after having touched historic peak of $23.1 billion on 30th June 2016. Global institutions and rating agencies including Moody’s, Standard and Poor’s, Forbes, Bloomberg, Economist and IFIs had all the positive reports on the macro-economic stability and achievements of Pakistan in the PML-N’s tenure to 30th June 2017 and PricewaterhouseCoopers report predicted Pakistan joining G-20 by 2030 and would leave economies of Canada and Italy behind. If said Dharnas and political destabilisation efforts by PTI throughout the last tenure of PML-N were not there, the economic performance of the country would have been even better. The author repeatedly offered PTI and other opposition parties to agree on a ‘Charter of Economy’ in order to keep economy free from politics but unfortunately none co-operated.

The above analysis of total public debt during different regimes since 1999 shows that the debt numbers cited by the incumbent government are baseless and the story weaved around the debt burden is self-serving and politically motivated, devoid of any economic merit. One sincerely hopes that the government stops mourning, as it had done in opposition in last five years, and gets down to work as people of Pakistan have already suffered a lot in its first seventy days through massive devaluation of Rupee, decline in Pakistan Stock Exchange Index (PSX) and sky-high increase in cost of living with unprecedented hike in prices of essential commodities, gas, and electricity etc.

The writer is a former finance minister and a fellow member of the Institute of Chartered Accountants in England and Wales.

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