EDITORIAL: Institute of Policy Reforms (IPR), a think tank headed by Humayun Akhtar Khan, a member of Pakistan Tehrik-i-Insaaf since 14 July 2018, has presented a damning report on the state of the economy and noted that while the current account deficit is under control at present yet “the respite is precarious and likely short lived. To all appearances the economy would stay in its present state of low growth, low exports, and close to default. What that leads to would depend on the policymakers.” The most critical problem, the report argues, is the repayment and servicing of external debt.
This newspaper has repeatedly urged the government to check not only its rising reliance on external debt irrespective of cost, including Sukuk/Eurobonds issued at rates three times the market rate, but also the rise in domestic debt. As per data presented by the government to the standing committee on finance, the Khan administration was compelled to borrow 17 billion dollars to repay loans incurred by previous administrations but acknowledged that 5 billion dollars was borrowed to meet expenditure during its own tenure.
Project-specific financing has been limited to around 215 billion rupees on average per annum for the last two years while the remaining over 2.18 trillion rupees external borrowing in the revised estimates of last year was utilized for budgetary support – a concern highlighted by the IPR which noted that during the 1990s 7.7 percent of total loans were used for budget support/balance of payment (BoP) support while during the last two fiscal years 70 percent of all foreign loans were so used. This should be the focus of attention of the newly-appointed Finance Minister Shaukat Tarin who has already gone on record to state that the Public Sector Development Programme (project-specific) must be strengthened in the next budget, which has traditionally played a lead role in raising the growth rate.
However, the other side of the coin ignored by government after government till the problem has assumed alarming proportions is the failure to check current expenditure (with its major component being loan repayment and servicing – an item that has been rising in percentage terms as a component of total current expenditure with each passing year). In the revised estimates of 2017-18, mark-up on foreign debt and foreign loan repayment accounted for 622,368 billion rupees; in 2018-19 mark-up on foreign debt and foreign loan repayment accounted for 1.234 trillion rupees (a rise attributable partly to repayment of debt incurred during the PML-N administration), which rose to 1.580 trillion rupees in 2019-20 with the current year showing a dramatic decline to 315,135 million rupees. This decline is a consequence of the G20 debt relief initiative extended to debtor countries, including Pakistan, due to the pandemic – a misnomer as it is not a write-off but a deferral for one year.
So why has mark-up (excluding foreign loan repayments) risen from 1.526 trillion rupees in 2017-18 to 1.987 trillion rupees in 2018-19, to 2.709 trillion rupees in 2019-20 and projected at 2.946 trillion rupees in the current year notwithstanding the G-20 debt relief initiative? The answer is in a dramatic rise in domestic debt which has unfortunately severe inflationary implications.
There is no doubt that the President, Prime Minister Imran Khan and members of his cabinet have reduced expenditures, but unfortunately these items form a very small percentage of the total budget and have therefore had no negligible impact on the budget outlay.
To conclude, it is imperative for the government to focus on curtailing current expenditure, reduce reliance on domestic and external borrowing and desist from borrowing from the commercial sector abroad (at high cost and short amortization period) – a reliance that began during Ishaq Dar’s tenure and continued during Hafeez Sheikh’s tenure. This would imply major sacrifices by all sectors, not limited to freezing salaries as in the current year – an income freeze that has been reversed subsequent to violent street protests by specific organised groups in the federal civil service. In other words, more unpopular decisions are called for if the economy is to turn around.
Copyright Business Recorder, 2021
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