ARTICLE: The Khan administration has been accusing previous administrations, more particularly the PML-N government, as being responsible for heavy foreign borrowing during its tenure 2013-18, which it argues, is the only reason for heavy borrowing during its 22-month stint in power - borrowing that accounts for a steady rise in annual markup costs, and with the rupee erosion compounding the country's annual debt repayments, leading to untenable budget deficits.
There are very few countries in the world other than small principalities like Luxembourg and Lichtenstein, and island countries for example Tuvalu, Macao, Singapore, Palau and Micronesia with a budget surplus. Germany, New Zealand and Switzerland have registered a surplus in recent years however the pandemic no doubt has eroded their surplus this year.
Thus to borrow to meet a government's expenditure needs, that include current expenditure, social sector development outlay (including cash disbursements to the poor during a pandemic), and development of physical and social infrastructure is not unusual or considered economically unfeasible; the problem arises if the amount borrowed, the interest payable, and the amortization period of the borrowed sum reaches economically untenable levels compounded by how much and what the government spends the borrowed money on activities that fuel productivity and provide the necessary lubricant to the economy including raising revenue or on current expenditure with little or no impact on productivity.
Pakistan's fiscal deficit target for next fiscal year is targeted at negative 7 percent against the revised estimates of negative 9.1 percent for the outgoing year, estimated on Gross Domestic Product (GDP) at market prices of 41.7 trillion rupees in 2019-20 that in turn is estimated on the negative 0.4 percent growth rate for this year (lower than the negative 1.5 percent projected by the IMF and the negative 2.6 percent growth rate projected by the World Bank) and an estimated 2 percent growth rate for next year with a total estimated GDP of 45.56 trillion rupees. All data preceding the word estimated, which applies to all data noted above as well as the data contained in the budget documents, are at best over-optimistic and over-ambitious projections or at worst downright deliberately unrealistic.
So how much and from what sources have the three consecutive civilian administrations (the PPP from 2008-13, the PML-N 20-13-18, and the PTI from August 2018 to-date) relied on to borrow to meet their rising expenditures? With respect to domestic debt during the PPP tenure Pakistan Investment Bonds (PIBs) - debt securities issued by the SBP - accounted for 411.6 billion rupees rising to 1321.6 billion rupees by 2013 (a rise of 221 percent); PML-N increased reliance on PIBs to 2303 billion rupees in 2014, and more than doubled the reliance to 4921 billion rupees by 2016. By 2018 after Ishaq Dar's ignominious departure from the country reliance on PIB was reduced to 3413 billion rupees. Disturbingly, the PTI government raised reliance on PIBs to a whopping 10.933 trillion rupees in 2019 and 12.254 trillion rupees by March 2020 as per the Economic Surveys of 2018-19 and 2019-20, a rise of 259 percent (no doubt more would have been and will be borrowed till the end of the fiscal year on 30 June). The budget documents reveal that while PIBs worth 200 billion rupees were budgeted for the outgoing year revised estimates placed the figure at 410 billion rupees, thereby projecting an additional 400 billion rupee PIBs issued this year. The bulk of the PIBs have a maturity of 3 to 5 years.
Market treasury bills rose from 536.5 billion rupees in 2008 to 4082 billion rupees in 2018 and to 5486 billion rupees up to March 2020 with the bulk of the bills with a three-month maturity (or short term). Reliance on Ijara Sukuk has risen from 1022 billion rupees in 2017-18 to 3635 billion rupees July-March 2020. For the outgoing year, treasury bills were budgeted at 300 billion rupees though only half of that, 155 billion rupees, were realized however next year the figure projected is 400 billion rupees.
Unfunded debt mostly consisting of national savings schemes rose from 1020 billion rupees in 2008 to 2868 billion rupees in 2018. By March 2020, it rose to 3455 billion rupees, no doubt the Governor SBP would claim this was due to the discount rate of 13.25 percent effective July 20 to March 2020 conveniently ignoring the negative impact on productivity and unemployment. Besides the rate of return on various savings schemes was raised after a time lag of over 6 months from when the discount rate was raised, which indicates that the savings rate of return is linked to the government's financing needs rather than to the discount rate.
National savings schemes were budgeted to generate 275.7 billion rupees in 2018-19; however, the revised figure is 426.8 billion rupees due to Covid-19 as sales of items other than food and necessities plummeted post-March 2020. Next year's budgeted target is around 215.6 billion rupees - a reduction no doubt attributed entirely to Covid-19 by the economic team leaders. The increase in savings did not increase investment and the investment environment remained under stress for the entire year leading to a 41 percent decline in the manufacturing sector year on year as per the Pakistan Bureau of Statistics.
Savings is linked to the Consumer Price Index (CPI) and post-Baqir's appointment to the discount rate: the higher the inflation the lower the capacity to save. The CPI was 8.6 percent in 2013-14, 4.8 percent in 2016-17, 4.7 percent in 2017-18, and 6.8 percent during the tenure of Asad Umer as the Finance Minister. It jumped to 11.2 percent in July-March 2019-20 or in other words, the claim that the discount rate was designed to contain inflation is inaccurate as post-IMF programme the rate has doubled.
Total domestic borrowings were 3.2 trillion rupees in 2008, rose to 9.5 trillion rupees in 2013 and by 2018 the figure was 16.4 trillion rupees. By April 2020, the SBP website gives a total of 23.5 trillion rupees.
External debt and liabilities rose from 456 billion dollars in 2008 to 83.4 billion dollars in 2017 and 95.2 billion dollars in 2018. By March 2020, (which does not take account of the Covid-19 loans of an additional 2 billion dollars) total debt and liabilities had risen to 109.9 billion dollars - a rise of 15 percent. The largest single rise in total debt servicing from one year to the next was in 2019 - to 9.4 billion dollars against 5.8 billion dollars in 2018, 6.4 billion dollars in 2017. Be that as it may, the economic team leaders have in the Letter of Intent submitted to the IMF for the Extended Fund Facility claimed that 38.6 billion dollars would be required for the programme duration of 39 months, and with 2 billion dollar additional loans acquired for Cvoid-19, the government intends to borrow a billion dollars a month.
The Economic Survey indicates that by March 2020, before the additional 2 billion dollars was borrowed for Covid-19, total debt and liabilities of the government stood at 109.9 billion dollars. In 2018, the total was 95.2 billion dollars while in 2013 the amount was 60.8 billion dollars. Thus Dar increased the country's foreign indebtedness by around 30 billion dollars the Khan administration has projected foreign borrowing of an additional 40.6 billion dollars in just three years and three months.
One would urge the Prime Minister to raise questions on his economic team leaders' penchant for breaking past borrowing records of not only reliance on domestic borrowing, a highly inflationary policy, but also on foreign borrowing, rather than in taking decisions that would fuel growth (by supporting expansionary policies) which in turn would raise productivity and revenue thereby reducing the need to borrow.
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