Drowning in debt

Drowning in debt

What has the budget 2014-2015 brought in for the common man? While the answer to this question may not be reassuring for the common man and may end up in a situation where he has no option but to borrow, let’s see how entrenched in debt we already are.

Every Pakistani who has not borrowed any money from any of the domestic source or international financial institutions ever still has the debt burden of PKR 93,676 (US $954) as of March 2014.

This per capita debt of PKR 93,676 is derived by dividing total population 188.02 million over total external debt and liabilities of PKR 17.61 trillion (US $ 179.3 billion). In comparison to this, a country with a similar population and per capita income levels, Nigeria’s, debt burden is as low as US $372.

At the end of March 2013, when the last government completed its tenure, the per capita debt was PKR 84,011. During the first 9 months of the ongoing FY 2013-14 of the current government regime the net increase in the per capita debt is PKR 9,665.

At the end of March 2008, when the last government took charge, the per capita debt was PKR 38,261. One can clearly observe the increase of around 125 per cent in the per capita debt during the last government tenure as compare to the total per capita debt from the last 61 years (1947-2008). The net increase in the per capita debt was PKR 45,750 on average, PKR 9,150 per year during 2008-2013.

Talking about the population of Pakistan, sadly, we do not have any updated exact population figure in Pakistan as the last census was conducted in 1998 and since then no exact figure of population has been given and only the estimates are being provided. The Economic Survey 2013-14 provides the projected population of 188.02 million, with a population growth rate of 1.95 per cent per annum and the same has been used for calculation of per capita debt.

Debt limits were approved by the parliament in 2005 through the Fiscal Responsibility and Debt Limitation Act 2005.

According to the State Bank of Pakistan, the debt and liabilities have increased to a record mark of PKR 17.61 trillion (69.3 per cent of GDP), including domestic debt and liabilities 11.54 trillion rupees and external debt and liabilities 6.07 trillion rupees (US $ 61.80 billion and 23.9 per cent of GDP) at the end of third quarter FY2013-14.

Pakistan’s debt dynamics has undergone substantial changes in the first three quarters of the ongoing fiscal year and in the PPP government’s five years. In the first 9 months of the ongoing fiscal year, the public debt and liabilities were PKR 1.27 trillion.

At the end of March 2008 Pakistan’s outstanding public debt and liabilities were 6.16 trillion rupees (59 per cent of GDP), including domestic debt and liabilities of 3.26 trillion rupees and external debt and liabilities US $45.9 billion (Rs2.89 trillion).

Debt limits were approved by the parliament in 2005 through the Fiscal Responsibility and Debt Limitation Act 2005. One of the clauses of this act is "ensuring that within a period of ten financial years, beginning from the first July, 2003 and during the thirtieth June, 2013, the total public debt at the end of the tenth financial year does not exceed sixty per cent of the estimated gross domestic product for that year and thereafter -- maintaining the total public debt below sixty per cent of gross domestic product for any given year".

However, one can clearly see that this was not followed by the last government as at the end of June 2013, Pakistan’s outstanding debt and liabilities stood at PKR 16.34 trillion which was 72.7 per cent of GDP. This clearly indicates the complete failure of debt management.

Pakistan’s debt and liabilities have grown very sharply over the past few years since 2008 and increasing debt burden is eating into fiscal resources. This is also leaving severe impact on inflation, because high government borrowing will follow anyway. This debt situation has huge impact on growth, investment and fiscal stability.

The past debt burden has come up from two significant features -- first, to sustain the loss-making public sector enterprises and, second, government’s continued policy of maintaining untargeted subsidies. And the new debt has arrived due to the current government’s appetite to fund infrastructure through Euro bonds, Chinese loans, borrowing from multilateral institutions and perhaps soon to come Sakook bonds. One wonders if debt financing should go into building motorways or giving respite to the nation from energy crisis.

The management of debt crisis is based on two points; first is debt-servicing and second debt-retirement. When it comes to the servicing aspect of debt, one needs to focus on the government’s capacity to generate revenues, and in that context, tax reforms become extremely important.

But to go forward, one needs to put in place a debt-retirement strategy, the need to generate growth. If one is not on a high-growth trajectory, one is not generating enough revenues so that debt can be retired. For generating growth, of course, the government needs to have a consensus strategy having all the provinces on the same page.

In a country of around 200 million people, only 2.6 million are NTN holders and around 0.7 million actually paid taxes last year. The corporate sector represents only 1 per cent of overall tax base. Out of over 50,000 companies registered with SECP, only 24,000 are NTN holders. The agriculture sector which contributes 1/5th of GDP remains exempted from income taxes and same is true for many of the services sectors like wholesale and retail trade.

Due to the structural transformation in Pakistan’s economy, several new sources of income have also appeared in the current reporting of national income accounts at the Pakistan Bureau of Statistics. For example, several services sub-sectors including private doctors, tuition centres, accountants, IT and software houses and beauty parlors fall in this category. According to the FBR claims these sub-sectors are still out of the tax net and many continue to operate for decades in an informal setting.

Taxation on agriculture income should be debated and innovative ways to tax either through land revenue or agriculture produce should be introduced together with enhancing of capacity of revenue collecting authorities.

The government must follow a stringent debt management strategy. The limits set in the FDRL must be respected. Debt with expensive servicing requirements should be retried at the earliest and there should be no new debt without a discourse in parliament.

Drowning in debt