Rising public debt!

The Asian Development Bank's recent report expressed concern over a dramatic rise in Pakistan's domestic and international debt: domestic debt rose by 29.2 percent (33 percent of Gross Domestic Product) to 6 trillion and external debt rose to 56.3 billion rupees (26 percent of GDP) to 4.8 trillion. The latest set of statistics released in the Economic Survey 2010-11 give the cumulative total public debt picture for fiscal year 2010 at 60.2 percent of GDP.
The obvious reasons for the rise in public debt are twofold. First and foremost, the federal government failed yet again to increase its tax-to-GDP ratio. Last year, the total budgetary tax collection target was downgraded three times and much to the chagrin of our international donors, specifically the International Monetary Fund, the claim by the Chairman of the Federal Board of Revenue, made on the last day of the year, had to be downgraded by a whopping 38 billion rupees. This has without doubt widened the trust deficit between the Fund and the government leading many analysts to maintain that the next IMF loan arrangement may have more stringent pre-loan conditions which would have to be implemented before the country receives the first tranche. It is not yet clear what the Pakistani economic team would opt for, namely to reactivate the stalled Stand-By Arrangement (SBA), stalled due to failure to implement key loan conditions, or request for another loan which would have more stringent conditions, but may give the government the wherewithal to begin repayment of the SBA that becomes due in February next year. The government is expected to intimate its decision to the Fund on the sidelines of the IMF/World Bank annual meeting starting in the third week of September.
Second, the government has failed to adopt austerity measures that are the need of the hour, and this need was identified soon after the PPP-led government took over power in 2008. The country's economic team would be well-advised to look at Greece and Italy, where public protests are mounting as their governments begin massive austerity drives that are major conditions for the release of the next bailout package. What is rather ironic about Pakistan's case is that the conditions that would have hurt the common man have been implemented and include an upward revision of tariffs as well as reducing the public sector development programme (from the budgetary allocation of 663 billion rupees to 462 billion rupees) and slashing the development programme outside of PSDP, including the Benazir Income Support Programme (by 15 billion rupees), and relief, reconstruction and rehabilitation and security of Internally Displaced Persons by a hefty 45 billion rupees.
What has not been slashed is current expenditure which witnessed a rise of 298 billion rupees - with budgetary allocation of nearly 2 trillion to 2.29 trillion in 2010-11. Defence, the oft-cited reason for increase in current expenditure, accounted for a 50 billion rupees rise in comparison to its budgetary allocation, with only an additional 87 million rupees targeted towards operating expenses reflecting the ongoing war on terror. The bulk of the increase in current expenditure was not attributable to a rise in foreign and domestic debt liabilities as foreign loan repayment (particularly the IMF loan with repayments expected to commence in February next year) of 174 billion rupees as per 2010-11 budget was revised downwards to 127.4 billion rupees. The reason: 2010-11 budgetary estimates of external loans inflow and grant assistance were overstated by 32.2 billion rupees and 64.5 billion rupees, respectively. This accounted for the government borrowing internally and resulted in 653.6 billion rupees for servicing of domestic debt as opposed to the budgetary estimate of 621.7 billion rupees. And the biggest beneficiary of a rise in current expenditure was under the head of transfer payments, which reflect the bailout packages to poorly-run state entities as well as to periodic efforts by the government to deal with the inter-circular debt, thereby enabling Pakistan State Oil to pay for its imports.
The prescriptions for getting out of the debt trap are available to even a freshman of economics: improve governance, increase tax-to-GDP ratio, reduce current expenditure, ensure that there is availability of basic infrastructure like energy and jobs as well as credit must be extended on merit. However, our governments remain resistant to implementing these prescriptions.