Deepening debt trap

The only way out of the prevalent fiscal mess is to accelerate growth, generate employment, enhance tax revenues and stop financing luxuries of elite

Deepening debt trap

Pakistan’s fiscal mess continues unabated as the Federal Board of Revenue (FBR), yet again (this is the sixth consecutive year) failed to achieve the revised target of Rs2275 while the original budget target was Rs2475 billion. On the one hand, the present government has failed to meet the revenue targets and on the other it has made the tax system more oppressive by enhancing indirect taxes and adding new withholding provisions in the income tax law.

After adding many extra billions to the debt burden -- an act that has plunged the terrorism-hit country into an unmanageable "debt trap" -- our finance minister is beating the victory drum by declaring that the World Bank would be lending $15 billion during next five years while other lenders, like Asian Development Bank, Islamic Development Bank, have also started "taking new rulers seriously".

On June 30, 2013, our total domestic debt was Rs14 trillion which as of today has exceeded Rs17 trillion. Increase of three trillion rupees in one year is terrifying. Nobody in the National Assembly or Senate is worried about erosion of our resources largely consumed by debt servicing. Nobody has a plan of how to come out of this ‘debt prison’, which is the main cause of our political subjugation.

When the PPP government was borrowing on an average of Rs3-4 billion a day, Senator Ishaq Dar was very critical and now he is resorting to the same with more zeal, rather greed. His borrowing on average during the fiscal year 2013-14 was Rs9-10 billion a day -- yet he keeps on accusing his predecessor regime for all the ills!

Pakistan’s obligations on external debt are also rising enormously -- in debt servicing alone there was rise of 55 per cent in fiscal year 203-14 as compared to immediate preceding year. As the country’s external debt burden is increasing, in the coming years, the government will have to borrow more, just to repay past loans. The domestic debt will also increase as the government has failed to broaden the tax base and reduce expenditure.

During the just-ended fiscal year 2013-14, the government registered shortfall of nearly Rs275 billion in revenue generation (both taxes and non-taxes) and exceeded its sanctioned current expenditure by Rs112 billion. The current expenditure was Rs3242 billion whereas the FBR collected only Rs2262 billion. The government was understating the expenses and overstating the revenue to hide the actual budget deficit. We have already pointed out in our last column that revenue collection by the FBR was overstated to the extent of Rs150 billion, if not more.

During its election campaign, Pakistan Muslim League-Nawaz made tall claims that on assuming power it would get rid of the "cancer of external debts" -- but now it is knocking the doors of international lenders even more vigorously than Pakistan People’s Party.

The sad story of manipulating figures as well as projecting rosy picture by the government continues unabated -- the government last year provided Rs1.325 trillion in debt servicing while the IMF projected the figure at Rs1.352 trillion. The official estimates on subsidy of Rs203 billion are also contested by the IMF claiming these may rise to Rs229 billion.

In fiscal year 2013-14, the actual spending on subsidies was Rs83 billion higher than the budgeted amount. The IMF says defence budget will be Rs706 billion -- higher by Rs7 billion than shown in the budget. The IMF says Rs442 billion would be spent on grants -- Rs71 billion higher than official figures as most of these grants are given to the armed forces to meet their expenses not stated as defence budget.

The IMF has shown the total development spending at Rs1.012 trillion against the figure of Rs1.175 trillion, approved by the National Economic Council. The IMF has no reservations over figure of federal development budget at Rs525 billion, but for provincial spending its figure is Rs486 billion against the official version of Rs650 billion. The IMF is given assurance by the federal government that the four provinces will save Rs289 billion from their budgets to keep the overall budget deficit at 4.8 per cent of the GDP. This is the murky economic position about which our rulers are claiming to have achieved wonders!

Situation on external debts is even murkier. According to the IMF, Pakistan would need nearly $10.8 billion for the fiscal year 2014-15 -- the bulk of this will go towards returning foreign loans. The government will require $3.1 billion alone to meet the current account deficit. It needs further $5.4 billion to retire medium and long-term loans including $1.3 billion to the IMF. Another $3.6 billion are required to pay back loans acquired from other creditors like the World Bank and Asian Development Bank (ADB). An amount of $2.3 billion would be required to return short-term loans that the present government received in the last one year.

The available financing is only $6.5 billion while the rest is expected to come through foreign direct investment and privatisation proceeds. Many believe that these estimates are too ambitious -- there are difficulties in attracting foreign investment because of the prevailing law and order situation and bureaucratic hurdles.

For meeting the gap of $4.3 billion, reliance is being placed on financing from the IMF, World Bank and some other foreign lenders. What will be the conditions associated with fresh loans and timeframe for securing the same have yet not been made public. The IMF is expected to make gross disbursement of $2.23 billion to Pakistan in the fiscal year 2014-15 -- out of this we will return $1.3 billion as repayment and net support would be only $937 million.

The World Bank is likely to provide $1.3 billion in policy loans with no contribution committed by ADB so far. Under the IMF conditions, the government is to increase its gross reserves to $13.3 billion by the end of the current fiscal year, an increase of $4.1 billion over the reserves held as on June 30, 2014. In the presence of $10.8 billion external financing needs, it is going to be a daunting task.

The only way out of this prevalent mess is to accelerate growth, generate employment, enhance tax revenues, and stop financing luxuries of elites and losses of public sector enterprises (PSEs). But the present government like its predecessors is not serious about it. During its election campaign, Muslim League-Nawaz made tall claims that on assuming power it would get rid of the "cancer of external debts" -- but now it is knocking the doors of international lenders even more vigorously than Pakistan People’s Party.

In the face of these challenges, the government is not inclined to impose fiscal discipline and stop reckless borrowings to pay off liabilities of the corruption-ridden inefficient PSEs. All the governments -- civil or military alike -- have failed to end debt enslavement by raising revenues even to the extent of Rs6 trillion, though actual potential is around Rs8.5 trillion. Unless we tap the real tax potential, Pakistan will remain in ‘debt prison’.

Expending billions on tax-free benefits and perquisites for the elites is worsening the miseries of the poor. Look at residences of the president, governors, prime minister, ministers, judges, generals and high-ranking civil officials with an army of servants and fleets of cars. Wasteful spending on these elites could have helped in poverty alleviation and ending economic deprivation of millions. Unwillingness of the rulers to tax the rich is playing havoc with the economy. The present crisis testifies to the failure of power-hungry, money-greedy politicians and incompetent, inefficient and corrupt bureaucrats.

Pakistan cannot come out of debt-enslavement unless state conforms to the principle enshrined in Article 3 of the Constitution -- from each according to his ability, to each according to his work. For this, everyone should be given work with a fair reward in return.

There should be a complete change in the style of governance -- the president, governors, prime minister, chief ministers, ministers, parliamentarians, and high-ranking government officials should live like ordinary citizens. Palatial residences occupied by them should be sold or converted into income-yielding assets. All perquisites of government servants and public office-holders should be monetized to remove the burden off our country’s broken financial back.

Deepening debt trap