Pakistan: Domestic debt

According to a Business Recorder exclusive, rising fiscal deficit due to higher than budgeted allocations for current expenditure notably power sector subsidies and a shortfall in the budgeted tax collections as well as from external inflows account for an escalation of domestic debt by over one trillion rupees in the current fiscal year. Pakistani governments, the PPP-led government that recently completed its constitutionally mandated five years as well as previous governments, have traditionally focused on current expenditure with little or no production component (around 65 to 70 percent of the total expenditure) relative to development expenditure; and additionally in case of a shortfall at the end of the year have traditionally slashed development expenditure instead of current expenditure. At the same time our tax to Gross Domestic Product (GDP) ratio remains one of the lowest in the region and comparable only to some Sub-Sahara countries which has accounted for a rising reliance on external inflows to bring the budget deficit to some level of sustainability. However, recently multilateral and bilateral donors have begun to challenge our inability to reform our own tax system and compel the elite to pay taxes; in addition the post-2010 cessation of budget support by our donors is sourced to the government's failure to implement the agreed tax and power sector reforms under the 2008 supported International Monetary Fund (IMF) programme loan. The donors' stance at present is that the government must either get a Letter of Comfort from the IMF or else implement the reforms that it agreed to in 2008 to become eligible for budget support. Failure to do either accounts for heavy domestic borrowing with its implicit impact on the rate of inflation. Countries whose populations are suffering acutely due to a forcible austerity regimen imposed by donor agencies that is biting into social sector programmes targeted towards the vulnerable like in Greece, Portugal, Spain, Italy as well as in France have a debt-to-GDP ratio in excess of 88 percent and in some instances in excess of 160 percent. In Pakistan even though total debt nearly doubled during the past five years yet debt-to-GDP ratio has remained relatively stable even though it is projected to be slightly higher, a couple of percentage points at least, than the 60 percent allowed under the Fiscal Responsibility and Debt Limitation Act. Unfortunately though in the case of Pakistan there has been evidence of data manipulation that, if corrected, would almost certainly lead to a higher debt-to-GDP ratio than is acknowledged. The manipulation in question takes several forms. First and foremost, the budget documents in a footnote indicate that the fiscal balance excludes debt consolidation of power and food arrears. Subsidy to the power sector alone was revised upward last year to 440 billion rupees from the budgeted 147 billion rupees while in the current year the bar was raised to 291 billion rupees from the budgeted 185 billion rupees, an amount that is depleted with three months still remaining and more is likely to be released soon. Food subsidies accounted for around 38 billion rupees in the revised estimates for last year as opposed to 10 billion rupees in the budget - an amount that was budgeted to decline to 21 billion rupees this year. To put these two untargeted subsidy allocations in perspective for last fiscal year it is relevant to note that the subsidies were higher than the customs collections of 215 billion rupees and around half of sales tax collections of 852 billion rupees. Growth versus austerity debate is continuing to be waged in Western capitals as well as in the corridors of multilaterals and there is no consensus on any exact prescription with specified dosage of how much growth must be allowed within the context of austerity measures to fit the nature and extent of the disease (recession) in the country in question. According to Carmen Reinhart and Kenneth Rogoff of Harvard University, economic growth is likely to stagnate in a given country once the ratio of its government exceeds a threshold of 90 percent. Although, the results of this study have been questioned, but this study cannot apply to Pakistan because our primary balance is already in the negative. It shows that we are borrowing to meet our current expenditure and not for investment into our future, thereby expecting our future generations to pay this debt. We spent a trillion rupees to subsidise tariff of electricity supply instead of investing this amount in new power generation projects. It amounts to paying monthly rent instead of mortgage payment towards a home; that one day you can own. Borrowing must therefore be focused on development expenditure as that, by itself, contains the seeds for future growth which in turn will generate the capacity to pay off the loan. This is good advice, one that the next elected government would do well to follow.