EDITORIAL: Total government borrowing July-August 2021 has risen significantly during the first two months of the current year as per data uploaded on the State Bank of Pakistan website – 11.5 percent rise in domestic debt and 8 percent in external debt. These are extremely worrying statistics because they reflect three policies that require an urgent revisit.
First and foremost, the current expenditure not backed by development projects and therefore a major contributor to inflation is budgeted at 7.523 trillion rupees while the budgeted tax revenue is only 5.829 trillion rupees.
Debt repayment on external loans is not included in current expenditure for the second fiscal year due to the Debt Relief Initiative extended by the G7 in an attempt to strengthen developing countries’ capacity to cope with the pandemic. In 2020-21, current expenditure was budgeted at 6.344 trillion rupees which implies a budgeted rise of 18.58 percent this year in current expenditure at a time when inflation is a source of concern and growth the overarching objective, which is fuelled by development and not current expenditure.
In addition, during the three years of the PTI administration, budget deficits have been unsustainably high - a major factor behind International Monetary Fund’s (IMF’s) insistence to implement severely contractionary policies.
Second, the narrative of the government is that it is procuring loans simply to pay off past loans incurred unwisely by the PML-N government - a charge relevant as the then Finance Minister Ishaq Dar not only incurred external loans and debt equity (sukuk/Eurobonds) on the patently flawed premise that rates were lower abroad relative to Pakistan but he also kept the rupee overvalued to understate the standard historical rupee erosion in any one year.
This narrative is finding little traction amongst economists today for three reasons: (i) the rupee erosion – from 152 rupees to the dollar in May 2021 (the rate used in the budget) to over 170 rupees to the dollar today has been calculated to have added 1.8 trillion rupees to the foreign debt component; (ii) maturing debt repayments are estimated at 5.15 trillion rupees (which must also include the PTI administration’s heavy reliance on commercial borrowing typically of very short duration and at a high rate of return) with the government projected to borrow 5.87 trillion rupees over the next three months of which 720 billion rupees is to be borrowed to fund the budget; and (iii) heavy reliance on domestic debt continues unabated – 16.5 trillion rupees in August 2018 to 26.279 trillion rupees today or a rise of 60 percent in three years. Needless to add, this rise in domestic debt included the conversion of short-term maturing debt to long-term debt when the discount rate was 13.25 percent raised the indebtedness of the government. And compromised the government’s thrust to provide higher credit to private sector and the concessional interest rate on loans to the poor will at least initially raise the money supply that would further fuel inflation.
This state of affairs renders one quote in order. Ronald Reagan, former US President, had put it succinctly: “We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” In Pakistan, however, we have a trillion-rupee debt not only because we don’t tax enough people but also because we spend too much on current expenditure.
Copyright Business Recorder, 2021
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