Pakistan's debt limit

Pakistan's total public debt has risen by a whopping 82 percent since 2008. In 2001-02, the second year after Musharraf's coup, the debt to Gross Domestic Product (GDP) ratio was as high as 79 percent but declined to 55.4 percent by the near end of the Musharraf era in 2007. The current debt-to-GDP ratio is 59.3 percent, expected to rise till the end of the current fiscal year ending on the last day of June. By no stretch of imagination can the government put the entire onus of this disturbing statistic squarely on the policies of its predecessor four years after it took over the reins of control.
The time period the PPP has been in power is sufficiently long for it to bear the brunt of the blame. There is of course a real danger that Pakistan may violate the Fiscal Responsibility and Debt Limitation Act 2005 (FRDL) which has the following conditions: (i) public debt not to exceed 60 percent of GDP which, critics allege, would not be violated due to statistical massaging; (ii) public debt to reduce by 2.5 percent of GDP each year, a condition being violated since 2007; (iii) revenue deficit eliminated by 2008 and a surplus to be maintained thereafter is also routinely being violated; (iv) guarantees to borrowings of public sector entities of not more than 2 percent of GDP in any given year is also being violated; and (v) expenditures on poverty and social sectors not to be reduced below 4.5 percent of GDP. This allocation has been curtailed each year to ensure that the first condition of keeping the debt-to-GDP ratio at 60 percent or under is not violated. Be that as it may, social sectors are now transferred to provinces and there is a need to revisit the FRDL.
The question is why has debt risen so alarmingly? Post-9/11, there were heavy injections from external sources to the national treasury - injections which were a reflection of the West's emerging political compulsions as opposed to support for Pakistan's military ruler, or indeed for the economic policies in place during his tenure. The fact that consumption rose dramatically during the Musharraf era propelled the country's GDP growth rate, however it was not backed by appropriate allocations for the development of the energy sector. By the end of 2007, heavy subsidisation of petrol and products in the face of a massive rise in the international price of oil and products as an election strategy led to an unsustainable budget deficit of 7.6 percent that, in turn, compelled the PPP government to seek an International Monetary Fund programme. The blame at that moment in time rested with the Musharraf era economic managers.
The present government's consistent failure to adopt prudent reform policies agreed with the Fund in November 2008 with respect to power sector reforms (a major impediment to enhancing private sector productivity) and the tax system with the objective of broad-basing it by removing exemptions led finally to the suspension of the IMF package which, in turn, accounts for the government's inability to convince bilateral or multilateral donors to provide budgetary support. Additionally, the ongoing issues with the US have led to a slowdown of pledged assistance disbursement - both under the Kerry-Lugar bill and the Coalition Support Fund. Thus with the significant contraction of external support, the government turned imprudently to borrowing domestically. The Economic Survey 2010-11 warns that "Pakistan's debt dynamics have undergone substantial changes in the last three years. Higher fiscal deficit led to accumulation of huge debt in absolute and relative terms."
Those who have been urging the government to implement austerity reforms as a means to check the fiscal deficit have been stumped by the government's decision to inject massive subsidies under the head inter-disco tariff differential, which essentially implies that the inefficient discos are being provided subsidies. The claim that defence allocations due to the ongoing war on terror account for the failure to keep within the budgetary allocations on current expenditure is not borne out by facts and figures contained in the budget. Subsidies not backed by output accounts for spiralling domestic inflation, as well as an eroding rupee.
The current account deficit has also been rising, a reflection of poor domestic output partly attributable to the government's crowding out private sector borrowing, energy shortages and law and order issues. The only good news on the economic front is the high level of remittances, due partly to the historically low interest rates globally, as well as high inflationary pressures in Pakistan, and the approval by the World Trade Organisation that would allow 75 Pakistani products' duty-free entry into the European Union for a period of two years on humanitarian grounds. Be that as it may, the good news is unlikely to arrest the steady decline in the quality of life of the people of this country with obvious political overtones. Inexplicably the government remains focused on its political misfortunes, with little if any focus on undertaking reforms to deal with the existing economic malaise.