No guilt or shame

High and rising debt constitutes a serious threat to economic prosperity for a number of reasons. It acts as a major impediment to growth and hence to employment creation and poverty alleviation. Rising debt also discourages both foreign and domestic investment because it creates uncertainty about the government’s policy and crowds out private investment. It further puts pressure on the exchange rate thereby causing sharp depreciation with an attendant rise in public debt and inflation.

Public and external debts have grown over the last five years at a pace never witnessed in the country’s history hitherto. Public debt (both rupee and dollar components of debt) has increased at an average rate of 21.5 percent per annum in the last five years (2007-12) as against an average rate of 6.6 percent per annum during the first seven years (2000-07) of the previous decade.

Within the public debt, it is the domestic debt that has grown at a faster pace (24.1 percent per annum) than external debt. For Pakistan, the extraordinary surge in domestic debt is more worrisome because it is relatively more expensive. Interest payment has emerged as the single largest component of budgetary expenditure, of which the interest payment on domestic debt accounted for over 90 percent of the total.

Pakistan’s external debt and liabilities (EDL) reached $66 billion by the end of June-2012. The country has added almost $20 billion in EDL in five years. Had it not been for the suspension of the IMF programme over the last three years, Pakistan could have added another $5-6 billion in debt at the minimum.

Many factors have contributed to the recent surge in debt, and prominent among them are persistence of large fiscal and current account deficit and sharp depreciation of exchange rate. Absence of economic governance, weak economic team and dysfunctional debt office of the Ministry of Finance further added fuel to the fire.

The depreciation of the exchange rate has added almost Rs1450 billion or 18.5 percent to the increase in the public debt alone. It is horrifying to note that after 60 years of existence, the stock of public debt stood at $4.8 trillion but the country added Rs8 trillion in just five years to reach $12.8 trillion. Higher public debt has caused the interest payment to more than double in the last five years, crowded out private sector investment, and forced the government to curtail the much needed public sector investment.

Pakistan’s prevailing economic condition provides a classic textbook example of the adverse consequences of growing indebtedness. It has made the country more vulnerable to shocks and crisis, discouraged both foreign and domestic investment, slowed economic growth, gave rise to both unemployment and poverty, and put the exchange rate under a free fall regime. At present, foreign exchange reserves are declining and the country has entered into a debt repayment crisis. And yet, there is no feeling of guilt or shame on the part of the government and its economic team.

Pakistan is likely to face a serious debt crisis in the current year (2012-13) and the next year (2013-14) when it will have little capacity to repay its external debt. Pakistan’s external debt servicing will amount to $6 billion in the current and to $7 billion in the next fiscal year owing to heavy repayment due to the IMF.

With foreign exchange reserves of the SBP dwindling fast, declining from $10.8 billion in June 2012 to $8.7 billion in January 31, 2013. Pakistan will face serious difficulties in servicing its external debt obligations. Consequently, it will have no option but to seek IMF assistance, most probably in a desperate condition.

How to reduce the country’s debt burden? To bring the debt situation under control, the new government would need to undertake the following measures. First, credible efforts will have to be made to bring the budget deficit in the range of 3.0-3.5 percent of GDP in the next three years.

The reduction in the budget deficit must come largely from raising tax resources by broadening tax bases, reducing tax rates and strengthening the tax administration. Expenditure rationalisation should be the integral part of the deficit reduction exercise.

In particular, the government will have to take bold decisions regarding the bleeding public sector enterprises (PSEs). These PSEs cannot be restructured as it has been done many times in the past. Outright privatisation is the only solution available to the government.

Second, stability in the exchange rate is vital for reducing the country’s debt burden. Thirdly, revival of economic activity should be the part of debt reduction strategy. Fourth, a vibrant debt office is absolutely essential to manage the country’s debt. Finally, Pakistan’s debt burden cannot be reduced without injecting financial discipline in the provincial governments.

The new NFC Award has added fuel to the fire. The capacity of the provincial government to spend money prudently will need to be enhanced and some kind of binding constraints to be imposed on provincial governments to generate targeted surplus. Pakistan’s fiscal deficit and hence, public debt is now no longer in the domain of the federal government after the new NFC Award. For the sake of keeping the budget deficit low and reducing the country’s debt burden, financial discipline in provincial governments is absolutely vital.

Pakistanis are born free but they are in debt everywhere. Every child was born with a debt of Rs.30,000 in 2007. Today a child is born with a debt of Rs76,000 and in June 2013 a child is likely to be born with Rs83,000 debt.

Pakistan has borrowed heavily from the future and is currently enjoying a living standard that is unsustainable. Unprecedented surge in debt is the road to ruin. The rulers of the country have become reckless spenders. No growth and prosperity can be achieved without reducing the country’s debt burden. Can our political leadership rise to the occasion?

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs. edu.pk