The Dar-Qadri duel

The Ministry of Finance issued a press release claiming that the charge levelled by Tahirul Qadri that the current government inherited 6.5 trillion rupee debt and raised it by an additional 5.5 trillion rupees is incorrect. Federal Finance Minister Ishaq Dar, the press release added, clarified that the government inherited 14.5 trillion rupee debt and there has been no significant increase in this amount during the last year. So who is telling the truth?
First off total debt was not 6.5 trillion rupees in 2014 according to the Economic Survey but 15.5 trillion rupees, however, the data provided was identified as provisional and inexplicably provisional data was released for two previous years as well - 2013 (14.4 trillion rupees) and 2012 (12.6 trillion rupees). The State Bank of Pakistan (SBP) website, however, indicates gross external debt position on 31st March 2013 (with the caretaker set-up in place) at 61.2 billion dollars, on 30th June 2013 at 60.8 billion dollars and on 30th June 2014 at 65.5 billion dollars. The two major contributors to the rise in 2014 debt profile as noted in the SBP were: (i) long-term loans - from 45.4 billion dollars on 31st March 2014 to 48.7 billion dollars on 30th June 2014; and (ii) bond issuance from 1.5 billion dollars on 31st March 2013 to 3.5 billion dollars on 30th June 2014.
Dar in the press release reiterated his earlier claim: the government was working on a well-planned comprehensive strategy to shift expensive debt into a cheaper debt in order to reduce overall public liabilities. This in effect has implied borrowing from the international market at 5 to 6 percent (though this raises questions as to why Dar approved one billion dollar Eurobond rate of 7.5 percent for five year bonds and another billion dollars at 8.5 percent for 10 year bonds) and repayment of the domestic debt borrowed at 12 percent.
But what is of serious concern is the potential external borrowing of the government: (i) 32 billion dollars from the Chinese government (it is unclear whether the 34 billion dollar investment that the government claims it has been compelled to forgo due to the cancellation of the visit of the Chinese premier due to ongoing dharnas was in addition to the 32 billion dollars announced last year by the government), (ii) 12 billion dollars from the World Bank over five years; and (iii) floating ijara sukuk and additional Eurobonds though the amount is not yet identified. In short total external debt may reach 70 billion dollars by the end of the current year if the government manages to increase external debt by another 5 billion dollars as it did in 2013-14. However, the rise in external debt is taken in conjunction with a conservative 5 percent annual depreciation of the rupee that would add up the interest payable on external debt by more than what would have been payable from domestic debt.
According to data released in the Economic Survey 2014 domestic debt was 4.6 trillion rupees in 2010, 6 trillion in 2011, 7.6 trillion in 2012, 9.5 trillion in 2013 and 10.8 trillion in 2014. The rise in domestic debt after 2010 is easily explained: the 2008 Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) was suspended (with two tranches remaining) that led to cessation of all budgetary support (programme lending by multilaterals and bilaterals) compelling the PPP-led government to enhance reliance on borrowing domestically. The reason for suspension was failure of the government to implement tax and power sector reforms. With the PML-N government taking the country back on an IMF programme with a commitment to implement the reforms that were not implemented by the PPP government programme lending was automatically restored.
The steady and significant rise in domestic debt is supported by the budgetary/revised allocations for interest payable on domestic debt: 845.6 billion rupees was budgeted in 2012-13 and revised upward to 952 billion rupees with 1 trillion rupees budgeted for 2013-14 that was revised upwards to 1.1 trillion rupees. In the current year 1.22 trillion rupees has been budgeted with an additional 100 billion rupees (around one billion dollars) expected in the revised estimates if last fiscal year is taken as a yardstick.
Gross domestic borrowing, according to the SBP website, rose from 9.7 trillion rupees in June 2013 to 11.1 trillion rupees in June 2014. While the figure for June 2014 is not included in the Survey for the simple reason that it was released before the figures were available yet it is relevant to note that the figure for June 2013 released by the SBP also does not match the figure released in the Economic Survey. Be that as it may, while domestic borrowing has increased cumulatively, yet the government has reduced dependence on it by heavier reliance on cheaper external borrowing, which was one of the four strategy pillars that Dar focused on (mentioned in the Economic Survey 2013-14 and in his budget speech).
The other three pillars were: (i) trading of government debt instruments on the stock exchanges (which may explain the massive rise in foreign portfolio investment). However, the IMF in its third review report maintained that "a strong appetite for longer-term Pakistan Investment Bonds auctions and the less than expected performances of T-bills auctions are signs that banks may require higher returns to cover fiscal financing needs and may call for a revised debt issuance policy to accommodate such higher yields; (ii) improve the rupee dollar exchange rate. The IMF in its third review noted that Pakistan authorities did not agree with IMF staff that exchange rate is somewhat overvalued and suggested that SBP should appropriately use open market operations to sterilise foreign exchange inflows and spot market operations to keep NDA in line with programme targets; and (iii) improve the macroeconomic situation of the country by proceeding with a set of reforms, however, risks to the programme as per IMF remain and include slippages dues to depressed growth, challenging security conditions and the reserve situation in spite of improvements remains weak.
External debt rose by 4.3 billion dollars in June 2014 compared with March 2013 (an amount roughly equivalent to 430 billion rupees if the dollar-rupee parity is taken at 100) and domestic debt rose by 1.4 trillion rupees - a not insignificant amount by any standards.
Thus both Tahirul Qadri and Ishaq Dar presented inaccurate figures though one could argue that Qadri did not have the necessary information or indeed expertise to analyse the data while Dar perhaps deliberately misled the parliament, the cabinet and, of course, the general public. Surprisingly Qadri understated the country's total debt, which an astute finance minister would have pounced on, yet Dar forever in the attack mode, challenged him and then proceeded to give his own flawed data.