The mounting debt burden


-Editorial

WEB DESK: The federal government has procured a total of 1.416 billion dollars from foreign commercial banks in the current fiscal year under the head of budget support against the budgeted 200 million dollars.

Data released by the Economic Affairs Division however does not indicate the rate of interest at which the additional 1216 million dollar loans were procured, though one may assume that the rate of interest on the budgeted 200 million dollars was part of the 2015-16 foreign debt servicing.

The Ministry of Finance issued a handout claiming that the most economical offer from prospective providers, or those asked to participate, was accepted. The handout that reportedly was drafted by the Secretary of Finance who is currently attending the 11th (second last) mandated quarterly review under the ongoing 6.64 billion dollar Extended Fund Facility extended by the International Monetary Fund programme in Dubai. He did this reportedly on the directives of the Minister for Finance who is currently attending the Asian Development Bank’s annual meetings in Germany.

It is indeed unfortunate that by failing to reveal the precise rate at which these loans have been procured smack of a deliberate lack of transparency, the hallmark of the Sharif administration, which has damaged its credibility and more specifically with respect to the Dar-led economic team fuelled speculation that has pushed the market sentiment further into the negative territory.

The Ministry of Finance’s handout notes that “one of the main challenges was the absence of external financing in the domestic exchange markets and tilting the composition of public debt towards domestic debt and that too into shorter maturity creating vulnerabilities and entailing high rollover and financing risks.” To put it in layman’s words, the handout acknowledges three disturbing elements. First, by stating that there is an absence of external financing in the domestic exchange markets may be taken to imply that remittances and other inflows are flowing through legal channels, essentially a positive feature.

Recent events, however, indicate that capital outflows have become more pronounced and in this context, it is relevant to refer to billions of dollars of recent real estate purchases in Dubai by Pakistani residents. Second, the government has acknowledged that it has begun relying heavily on domestic debt – to the tune of 41 billion dollars in just three years – which is short-term debt and due in 2016, according to Bloomberg. And finally, the handout is acknowledging that domestic debt is being rolled over at a much higher rate of return but would procuring a loan from the foreign commercial banking sector be cheaper and for a longer-term than borrowing from the local commercial banking sector?

This information too has been withheld, however, there is no doubt that rates are low in the West relative to Pakistan at the present moment in time; but loans procured from foreign banks are payable in foreign currency and given that the rupee has traditionally lost value at the rate of between 5 and 10 percent per annum heavier reliance on foreign banks relative to local may have higher costs at the time of repayment or rollover.

The reason for higher foreign commercial borrowing implies either a reduction in revenue or an increase in expenditure from what was budgeted. Revenue generation is essentially from two sources; namely, tax revenue, expected to meet the budgeted target subsequent to the mini-budget announced on 30th November 2016 that envisaged a one percent across the board raise in customs duty, raising it to 3 percent, levy of regulatory duty on 350 products as well as a raise in taxes on some items including used cars and cigarettes.

The non-tax revenue target is unlikely to be met. At present, hectic efforts are afoot to auction in spite of unfavourable market conditions, the remaining 3G/4G licences, by June this year to generate 35 billion rupees as opposed to the budgeted 65 billion rupees and the government’s over-estimation of profit of State Bank of Pakistan.

But at the same time the Prime Minister appears to be on a campaign trail to defuse demands for his immediate family to come clean with respect to the Panama leaks and he has begun announcing higher than budgeted outlays for those areas where he is holding public meetings. He is also refusing to allow petroleum and its products’ rates to be raised at present, in spite of a rise in their international price.

In other words, expenditure is going to be higher than budgeted while revenue will be lower necessitating higher and not lower than budgeted deficit which, in turn, would imply a rise in loans that would push up our debt. As Bloomberg put it succinctly in February this year, “since Sharif took the IMF loan, Pakistan’s debt due by end-2016 has jumped about 79 percent”.

Source: Business Recorder

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