WEB DESK: The Upper House of Parliament witnessed a heated debate on 13th November, 2015, on the outstanding level of country’s indebtedness and its impact on the economy.
Senator Sherry Rehman of the Pakistan People’s Party moved an adjournment motion in this connection and cautioned that total debt of the country had accumulated to over Rs 3.81 trillion and the external debt will swell to dollar 68 billion dollars by the end of the current fiscal after the disbursement of latest tranche of the Fund.
She observed that the policy was affecting the purchasing power of the common man and called for devising a plan to pay back loans, instead of piling them up to bolster foreign exchange reserves. Other members also questioned the logic of bolstering of foreign exchange reserves and meeting the fiscal deficit by more borrowings and warned that it would have dangerous consequences for the economy. They were of the opinion that debt had accumulated to a level where Pakistan would need dollar 6.7 billion this year for debt servicing.
Responding to the criticism of the opposition parties, Finance Minister Ishaq Dar said that the operation Zarb-e-Azb would cost the national kitty up to Rs 190 billion. “Foreign countries had pledged 6 billion dollars for the expenses being incurred on the operations but the government has received only dollar 350 million which is not considerable amount of money,” he pointed out.
External debt liability of the country is dollar 65 billion and not dollar 68 billion as quoted by the opposition. Foreign loans had become indispensable for the country as Pakistan had been declared as economically unstable country by international financial institutions in 2013 and government had to take loans from the IMF to repay the previous loans. External debt would have been far higher if the government had not reduced the fiscal deficit to 5.37 percent of GDP.
Transparency was also ensured in floating bonds in the international market. Pakistan would have a better future if all the parties put their heads together and jointly work on a national economic agenda.
A clear look at the statements of Sherry Rehman and other opposition members would reveal that while they were referring to and worrying about the broader picture of overall debt profile of the country, Ishaq Dar confined his comments largely to the reasons of huge borrowings and the necessity to indulge in such an undertaking.
We appreciate Sherry Rehman for highlighting the important issue of country’s indebtedness and its implications for the economy of the country although it would have been better if she had also commented on the gravity of the problem from various other angles. For instance, by borrowing more and more, we are only postponing the severity of pain of adjustment and mortgaging the future of coming generations. Also, are we not limiting the options of policy formulation in the coming years?
How will the country be able to meet debt servicing obligations after meeting current and development expenditures? Yearly (domestic and external) debt servicing is already increasing as a percentage of total revenues of the country. One needs to ascertain whether the primary deficit is going up or down. If such a trend persists, then would be no funds left for other purposes.
The formula of reducing fiscal deficit, as indicated by Ishaq Dar, to reduce the debt level may be correct but the government is not making the needed efforts to reverse the trend in a meaningful way. While efforts to mobilise higher levels of revenues are opposed tooth and nail by vested interests, the government continues to throw money in politically-expedient projects.
War on terror is our war and has to be fought mainly through mobilisation of internal resources. External borrowings at a higher cost is another mistake which is going to cost the country dearly in future. For instance, one cannot find enough justification of international bond floatation on a 10-years tenor at a rate (plus average PKR depreciation in a year) higher than 10-year PIB as the foreign exchange reserves’ position of the country may be comfortable.
However, we can only invest the forex reserve amount at a rate of about 1 percent or so. The country may not be in a debt trap at present; but needs to avoid it for a better future as well. We must find ways to get out of this undesirable situation through earning surpluses in the twin deficits of fiscal and current account balances. We feel that it is high time to form a Parliamentary committee that needs to co-opt some top level economists of the country and suggest practical ways to get out of the present debt turmoil in order to brighten the prospects of the current sluggish economy. Ishaq Dar has suggested such a way and the opposition parties should lend a helping hand to him in the larger interest of the country.
Although the current account balance has improved, it is still in the negative. Forex reserves build-up owes its existence to more debt. One must not also lose sight of the fact that home remittances are not growing at a pace seen in the recent past.
Trade balance has indeed improved largely due to a significant fall in international oil prices – so what needs to be done when the oil price rebounds as Pakistan remains an energy-deficient country? Net foreign investment needs to be jacked up in a major way in order to generate new job opportunities for teeming millions. Thus, both the Debt Management Office and Board of Investment (BoI) need to be made more proactive and result-oriented without any further loss of time.