Public debt: then and now

Federal Finance Minister Ishaq Dar never tires of comparing the performance of key macro-economic indicators during the five-year tenure of the PPP-led coalition government with his own one year’s performance. His unsurprising conclusion is that recovery is well on its way due to his policies. And a major indicator for the revival, according to Dar, is his ability to procure foreign loans, which he claims is a reflection of our donors’ confidence in his policies.

Foreign borrowing, Dar further contends, has been procured at around 5 percent – money he has used to retire domestic debt acquired at 12 percent thereby decreasing the country’s indebtedness. If this is so then the question arises as to why, given the low interest rates in the West did he still feels it appropriate to sell one billion dollar Eurobonds at 7.5 percent (maturing in five years) and 8.5 percent (maturing in 10 years)? This policy implies considerable foreign exchange risk, which even at a conservative 5 percent per annum depreciation would make repayment of the foreign debt a challenge in years to come. Be that as it may, the servicing of domestic debt for 2014-15 is budgeted at 1.2 trillion rupees against the revised estimates for 2013-14 of 1.1 trillion rupees against the budgeted 1.0 trillion rupees.

But then again asking Ishaq Dar a question that challenges his perception of his own performance, would elicit no response other than to accuse the questioner of making an anti-state statement with the insistence that he/she must support his (Dar’s) successful efforts to return the country to the international capital market after a period of seven years.

Seven years ago, Dar’s nemesis Shaukat Aziz held the Finance portfolio and he angered Dar by publicly accusing him of manipulating data to show a better performance than was actually the case during the two odd years before Musharraf’s coup. Thus for Dar to acknowledge that the country was operating in the international marketplace seven years ago is perhaps the only compliment, albeit back handed, that Dar is ever likely to give to the former prime minister in exile. Dar is now firmly focused on disparaging the policies of the Zardari-led government. It is unclear whether Dar’s current focused animus is attributable to the kudos that continue to be paid to Shaukat Tarin for insisting on the third party audit of the highly controversial rental power projects (which surely must account for a large number of anti-PPP votes in 2013) – a man who is seen in the corridors of power today though unfortunately without any power – or denigrating the economist Dr Hafeez Sheikh whose economic credentials were impeccable though his ability to withstand pressure from within the party almost non-existent.

However, the question remains whether Dar’s claim is legit that he reduced the country’s indebtedness by paying off domestic debt through incurring foreign debt? Budget documents released after Dar was given the Finance portfolio, requiring his approval prior to publication, reveal that the PPP-led government budgeted domestic permanent debt at 87.8 billion rupees in 2012-13 and the revised estimates for the year indicate that permanent debt was slightly lower than budgeted at 87.7 billion rupees. And this was in spite of the fact that 2013 was an election year and charges were hurled at PPP-led coalition government for incurring massive loans to implement projects – loans that were mainly domestic as foreign programme lending had been frozen since the second quarter of 2010 with the failure of the government to implement the reforms agreed with the International Monetary Fund (IMF) under the 2008 Stand-By Arrangement (SBA).

Dar budgeted a whopping 266.4 billion rupees as domestic permanent debt in 2013-14 (three and a half times more than the previous year) and exceeded this target by 26 billion rupees at 318.6 billion rupees as revealed in the revised estimates. For 2014-15 the Finance Minister envisages domestic permanent debt of 266.4 billion rupees, which again does not compare favourably when PML-N was not in power but with his own budgeted (as opposed to the revised figure) for 2013-14.

Floating debt (including prize bonds, market treasury bills, treasury bills through auction etc) is envisaged to rise to 13,964 trillion rupees in 2014-15 against the budgeted 9,714 trillion rupees last year with the revised estimates at 14,355 trillion rupees. The 2012-13 budget envisaged floating debt of 7,220 trillion rupees, a bit less than half of what was budgeted during the first year of the PML-N government. The Economic Survey 2013-14 untenably marks as provisional data debt for the past three years instead of the usual practice of just one year: 7.6 trillion in 2012, 9.5 trillion in 2013 and 10.8 trillion in 2014 leaving the ground open for some data juggling.

Dar-approved 2013-14 budget documents indicated budgeted interest payments on domestic debt of 845 billion rupees for 2012-13 with 952 billion rupees in the revised estimates. However, he budgeted 1,064.5 billion rupees in his first year’s budget for servicing domestic debt with revised estimates at 110.7 trillion rupees. For next fiscal year Dar has budgeted 1,224 trillion rupees. Servicing of foreign debt was 89 billion rupees during PPP’s last year in power with revised estimates even lower at 76.6 billion rupees. The PPP failed to procure budget support with the suspension of the IMF programme as noted above. Dar budgeted 89 billion rupees for 2013-14, which was 78.5 billion rupees in the revised estimates and has budgeted 100.6 billion rupees for next year.

Last year with Dar’s commitment to implement the politically challenging stalled power sector and taxation reforms IMF restored assistance. In all fairness it must be pointed out that the Zardari-led government’s Finance Minister Dr Hafiz Sheikh had recommended going on an IMF programme eight to nine months before the natural end of the PPP-led coalition government on 16 March 2013; however, he was opposed by the then State Bank Governor who withdrew his opposition when Dar came on the scene though that did not save him the job reportedly due to his penchant for leaking the truth to the media. Be that as it may, the PPP government was reluctant to go on an IMF programme, expected to have major negative political fallout – which analysts say is evident after one year of Dar as Finance Minister. The PPP had argued that the next government (and the PPP expected to emerge as the majority party after the 2013 elections) would be better placed to undertake IMF mandated reforms during the first year of its electoral victory.

There has been some improvement in macroeconomic data mainly because of the fiscal space created by the IMF loan, which was also evident one year after the SBA was signed in 2008. Donors had fully supported the PPP government at the time and its proof lay in the pledges made at the Tokyo Round of Friends of Democratic Pakistan but euphoria soon died with the government’s foot dragging in implementing tax and power sector reforms as well as massive corruption scandals.

One year of PML-N in power and the country waits for tax reforms, which would enhance documentation (Dar has relied on advance withholding taxes to increase revenue for yet another year) and power sector reforms (with loadshedding comparable to the PPP years) as inter-circular debt has resurfaced and transmission losses one of the highest within the region. There is a need to fast track agreed reforms in these two critical areas as well as by reducing domestic debt before one can extend a vote of confidence to the economic agenda of the ruling party.