Public debt a source of concern

The budget speech delivered by Finance Minister Ishaq Dar on the floor of the House on 3rd June made no mention of the upsurge in total public debt and therefore did not deal with rising concerns about its sustainability voiced by several independent economists, including former Finance Minister Dr Hafiz Pasha.

Dar in what has become his usual defence against any criticism did however state in the speech that “those who had predicted Pakistan’s default by June 2014 have been defeated. We have not only prevented the country from economic default but also have stabilised the economy.”

So what is the position of public debt, internal and external, today? From June 2013 to July-March 2016 long- and medium-term Pakistan Investment Bonds (PIBs), the largest component of domestic debt, were 261 percent higher at 4.7 trillion rupees.

According to the 2016-17 budget documents, permanent debt (with PIBs a major component) is targeted at 1,476,872 million rupees in 2016-17 – or 1,003,052 million rupees higher than the revised estimates of 473,820 million rupees in the outgoing year.

Floating debt is budgeted to decline from the 8,607,488 million rupees revised estimates of the current year to 6,911,420 million rupees next year, however, before expressing some appreciation for the intended decline it is relevant to note that the revised estimates for the current year were higher than the 7,883,340 million rupees budgeted amount for 2015-16 by 724,148 million rupees.

In addition, the budgeted decline for the next year is based on a decline in treasury bills through auction – from the budgeted 3,288,619 million rupees in 2015-16 to 2,219,811 million rupees in 2016-17; but again the difference between the budgeted amount for this year and the revised estimates is a whopping 818,749 million rupees, reflecting a massive deviation from what was budgeted – a trend that one may reasonably expect to continue and perhaps strengthen given that the IMF’s leverage to enforce its deficit targets would end after the last tranche disbursement under the EFF scheduled for September 2016 and the election mode economics expected after the Prime Minister’s return from London.

With respect to domestic debt – permanent and floating – the divergence between the budgeted and the actual may lead one to conclude that the budgeted amount for 2016-17 is understated at 1,247,000 million rupees.

External debt is to decline from the 727,533 million rupees budgeted in 2015-16 against the revised estimates of 821,426 million rupees to 796,785 million rupees in 2016-17. With programme loans – budget support – budgeted to decline from 324.6 billion rupees in the revised estimates for the current year to 133.7 billion rupees next year does not imply that the rest of the amount would be dedicated to project or development loans. Project loans too are expected to decline from 306.4 billion rupees in the revised estimates of current year to 219.1 billion rupees next year.

The bulk of the reliance of the government to meet its budget deficit targets would be from other aid which disturbingly includes a major increase in reliance on borrowing from the foreign commercial banks, short-term at high rates of return, to the tune of 211.5 billion rupees, sovereign bonds to the tune of 105.5 billion rupees, which if past precedence is anything to go by would be at a rate higher than the market, and sukuk bonds to the tune of 79 billion rupees.

Total public debt as a percentage of GDP was as per the Economic Survey 2015-16 as low as 58.9 percent of Gross Domestic Product (GDP) in 2011, reflecting the tenure of Shaukat Tarin as the Finance Minister to 63.3 percent when Dr Hafeez Sheikh, an economist, took over – a rise that may be attributed to his inability to convince his political colleagues that the rise was a source of concern.

During Dar’s tenure, total debt to GDP ratio rose to 63.5 percent in 2014, 63.2 percent in 2015 and 64.8 percent in 2016. The estimates during Dar’s entire tenure are inexplicably provisional as per the Survey – perhaps a tacit acknowledgement of routinely overstating of GDP. Or in other words, the debt to GDP ratio is higher than claimed.

In all fairness to the PPP-led coalition government of 2008-13, the decision to go on another International Monetary Fund (IMF) programme was taken in principle by the end of 2012, after the Fund had suspended the last two tranches under the 2008 Stand-By Arrangement in 2010 due to failure to implement politically challenging tax and power sector reforms.

However it was rightly felt that the appropriate time would be subsequent to May 2013 elections. In other words, the constant litany by the Finance Minister that had the PML-N government not come to power the country would have defaulted or done things differently given that the September 2013 Extended Fund Facility is patently inaccurate.

To conclude, by next fiscal year the EFF loan or the end of the period when interest and repayment of principle taken from aid to Pakistan consortium was deferred would end and by 2017-18 the likelihood of going on another Fund programme is likely to pay off these loans. The spectre of default would therefore once again loom on the horizon for whichever party wins the 2018 elections, like in 2008 and 2013.

Copyright Business Recorder, 2016