The US House of Representatives rejected two amendments seeking a $200 million cut in the $900 million Coalition Support Fund allocation for Pakistan in the Defence Appropriations Act for fiscal year 2017 - a move that will relieve Finance Minister Ishaq Dar - but won't reduce Pakistan's fresh borrowing needs triggered by his "economic stabilisation" strategy.
Ishaq Dar's 3-year-long policy of repaying maturing public debt by borrowing afresh, instead of incentivising the creation of requisite repayment capacity, has placed Pakistan on the route that led Greece to bankruptcy; given the existing debt burden, his planned fresh borrowing could burden Pakistan with unrepayable debt, both domestic and external.
By March 31, 2016 Pakistan's external debt crossed $69.558 billion, and domestic debt reached Rs 13.655 trillion. During the PML-N regime's current 3-year rule, domestic debt increased by Rs 3.891 trillion and external debt by $8.659 billion (in rupee terms, over Rs 907 billion). Thus the total increase was Rs 4.798 trillion or almost Rs 1.6 trillion per year.
Converted at the March 31 Re/$ exchange rate, total domestic and external debt reached Rs 20.941 trillion, or roughly $200 billion, implying there by that in the last three years the PML-N regime increased the public debt by 23 percent. Besides violating the Fiscal Responsibility & Debt Limitation Act, it is a baffling record in Pakistan's 69-year history.
While debt kept rising, current expenditures weren't cut and funds were deployed in marginally beneficial projects (over-priced Metro Bus services, motorways, LNG import), building the debt repayment capacity by supporting the export sector and import-substitution sectors, was ignored. While exports declined, imports didn't decline in line with the drop in the global oil price.
The suicidal "economic stabilisation" strategy forced continued borrowing for plugging the rising yet under-reported fiscal deficit. Proof: in June 2016 alone, FBR faces the impossible task of collecting Rs 448 billion to meet the 2015-16 tax collection target of Rs 3,103.7 billion. Like the previous two years, FBR may fail in this endeavour yet again.
The fruit of "economic stabilisation" strategy has been a steady slide in economic growth that Dar keeps denying to justify continued rise in public debt. The government's claimed 4.7 percent GDP growth in 2015-16 is being contested by analysts and research institutions who claim it was only 3.1 percent, which makes you wonder where the borrowed funds went.
That the debt acquired since July 2013 didn't augment Pakistan's debt repayment capacity is proved by the fact that in 2016-17, when debt servicing burden would be around $8.38 billion, the government plans to borrow another $6.58 billion via loans from international development banks, and $1.8 billion by floating Euro and Sukuk Bonds (as over-priced as the bonds floated in 2015-16?).
How the "economic stabilisation" strategy hurt the business community is manifested by its reaction to the indirect taxes imposed under this strategy. Once again, after the announcement of the federal budget for 2016-17, on a daily basis, newspapers have been publishing trade associations' advertisements appealing for revision of the proposed taxation measures.
Overseas Investors Chamber of Commerce & Industry very aptly summed up the malaise ailing Pakistan by pointing out to Ishaq Dar the fact that lack of predictability, consistency and transparency of policies - the key prerequisites in investment decision-making - and major shifts in tax policies without taking the stakeholders on board have impaired investors' confidence.
In the latest World Bank report on 'Ease of Doing Business' Pakistan has been ranked 122 out of 180 countries - down from its previous ranking of 114, and in respect of paying taxes, it is now ranked 171st - down from its 157th ranking earlier. In the overall credit rating, the World Bank has downgraded Pakistan's ranking to 133 from 128th. Yet Dar keeps claiming that Pakistan is now a 'business-friendly' country.
According to State Bank of Pakistan's Quarterly Compendium for March 2016, nearly 90 percent of the banking sector's investment portfolio comprises of investment in public debt paper, and in 11 months of 2015-16, private sector credit offtake was just Rs 249 billion (2.4 percent of total deposits), though higher compared to the Rs 146 billion off-take in 2014-15.
Of the total bank deposits of Rs 10,323 trillion, only Rs 4.782 trillion (ie 46 percent) were deployed in private sector credit; the rest along with banks' surpluses of capital and reserves adding up to Rs 7.421 trillion were invested in public debt paper implying thereby that banks' investment in public debt is now 155 percent of the total credit to the private sector.
All previous records of investing in public debt have been broken because banks have become risk-averse and are reluctant to lend to the SME sector. Why they are doing so isn't hard to understand when you look at the slide in Pakistan's rankings on the yardsticks of "ease of doing business" and "paying taxes" that discouraged lending to the private sector.
While banks can be blamed for being self-centered (true in a way since their profits didn't slide) because, by adopting the policy of excessive lending to the state, they are deploying peoples' saving in a low-productive venue; the sustained slide in GDP growth rate proves this disturbing reality, which banks must realise and make amends there for.
By sidelining SMEs, banks are damaging Pakistan's largely SME-dependent economy. When the Basle Regulations proposed assigning 100 percent risk-rating to SMEs, the then German Chancellor warned that Germany won't enforce those regulations because doing so will break the backbone of the German economy, and forced reduction of SMEs' risk-rating to 80 percent. But, undeniably, the indefinite delay in refund of taxes (exceeding Rs 250 billion) to the export sector led to many export finance loans going bad, and burdened the financing banks with loss provisioning and liquidity problems thereby inducing them to reduce lending to this vitally important sector. Same was banks' experience with financing IPP's receivables from the government.
Besides, didn't banks' risk-aversion provide the setting wherein the government could pursue its policy of reckless borrowing? Some analysts believe that worsening of the risk scenario was prodded by the government to create the environment for its unlimited borrowing from banks, and where bulk of that wealth ended-up is now being exposed by the over-priced projects that allegedly involved kickbacks.
In 2016-17, just interest payment (Ra 1.24 trillion) on public debt will consume 34 percent of the target tax revenue (ie Rs 3.6 trillion). Unless a miracle occurs that rationalises economic policies, Pakistan could suffer the fate Greece is now suffering. It is time those having the muscle to put the house in order woke up to save Pakistan from descending into an irretrievable state.
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