''National Debt Conference'': speakers bring under spotlight challenges of rising debt and debt servicing

Economists have urged the government to reduce the rising public debt as it will become a major source of macroeconomic instability, low growth, unemployment and poverty in the country. The government should scale down public debt, improve its composition, condition debt contracting with returns and manage it professionally. This was the gist of the ''National Debt Conference'' jointly organised by PRIME and Business Recorder in collaboration with Friedrich Naumann Foundation.
Dr Ashfaque Hasan Khan, the head of NUST, said that the present government claimed to have issued Rs 2.143 trillion worth of Pakistan Investment Bonds (PIBs) during nine months from January -September 2014 as compared to Rs 1.367 trillion during last thirteen years from 2000 to 2013. In other words, the present government issued almost 57 percent more PIBs in 9 months as compared to what were issued in 13 years. We have paid on average 2.5 percent or Rs 54 billion more on treasury bills per annum, he added.
He said that Pakistan became a chronic user of IMF resources and economic policymaking circles around the IMF/IFIs Programmes. The influence of IMF and IFIs in policymaking increased substantially. He added that there are serious flaws in the IMF programme. Pakistan will not benefit from the programme. It is a "self-serving programme" or "defensive lending" by the IMF. He added that the IMF is least interested in helping Pakistan; and it is more interested in getting its money back while the ongoing programme is designed to the lending agency''s purpose.
He summarised the IMF programme as "build foreign exchange reserves by buying dollars from the market, borrowing from IFIs, International Capital Market or from friendly countries and build reserves and pay us on due date." He further stated that the people had a lot of expectations from the newly elected government as they had claimed that they have a good economic team and have already prepared themselves to address multi -dimensional challenges being faced by the country. After sixteen months, the government does not appear to be serious on economic front and people have started losing hope. He said the people don''t see any change as compared to the past five years and overall perception is that "it is the same old car! Only the driver has changed".
Dr Ashfaque, quoting data from Economic Affairs Division, said the present government has borrowed a $12.5 billion new debt in just over one year. Economist and consultant for Economic Affairs government of Balochistan Dr Kaiser Bengali stated debt can be a useful instrument to promote investment for growth and development. He said a massive shift from project lending to programme lending has been a major factor behind a rise in external debt. Bengali added that there is need to ensure that the investment can be measured tangibly and the return from the investment is at least one percent greater than the cost of borrowing.
Speaking at the conference, former Governor of State Bank of Pakistan (SBP) Syed Saleem Raza defined the mandate of a professional debt management office which, according to him, is to reduce cost, develop sustainability of government debt, and contribute to building a framework for broad-based debt capital markets. He also stressed on the need for Control of Consolidated National Debt database, and centralised authority for planning, structuring, execution and market intervention, for government debt.
He said an independent and professional Debt Management Office (DMO) at Ministry of Finance should have the prime mandate to reduce cost, develop sustainability of government debt and contribute to building the framework for broad-based Debt Capital Markets (DCMs). The primary challenge of the DMO is to develop a strategy and initiatives to broaden government debt distribution outside banks by forecasting institutional changes in the DCMs.
Raza said the core responsibilities of a DMO included control of consolidated national debt database, and centralised authority for planning, structuring, execution and market intervention, for government debt. It also included controls of a spectrum of debt management functions, ie, Front Office (Trading), Middle Office (strategy, policy, risk management), and Back Officer (settlement, accounting). Other responsibilities of the DMO covered maintenance of market stability, supported by regulations and oversight by SECP/SBP covering market functionaries: primary dealers; market-makers and trading platform and rating agencies.
The functions of a DMO included reduction of annual PSBR, alongside budget, for Parliamentary approval; avoiding fragmentation; establishing and instituting a of long-term benchmark profile; diversifying interest rates, targets for fixed/floating debt, together with an active use of swaps and assurance of market integrity, via SBP/SECP, by requiring regular financial appraisals of issuers/market-makers, and its disclosure to investors.
The functions of a DMO covers risk management to ensure market stability and liquidity. It is required to be mindful of forward-looking indicators, ie forex reserves; maturity ''bunching''; contingent liabilities; hedging thresholds and monetary policy requirements, etc. It also included a regular market dialogue with domestic market intermediaries, and a liaison with foreign rating agencies, fixed-income fund managers and investors (road-shows).
Giving recommendations for a DMO, Raza said that it is highly desirable to have an independent DMO Board with Ministry of Finance/Finance Secretary, Governor/DG SBP, secretaries of EAD, Budget Wing; CDNS and key private market participants. A DMO ideally should have professional market experience; and it will need two or three other supporting market professionals, in trading and Strategy functions.
Presenting his paper, economist Sakib Sherani pointed out power sector subsidies, poor debt management and technical inefficiencies as factors for escalating public debt. Sharani held bad economic policies responsible for an 81 percent increase in the debt during last five to six years. Managing Director of Karachi Stock Exchange Nadeem Naqvi emphasised on the need for a deeper, more liquid GDS market which can enable greater participation in capital markets and help increase financial inclusion, make GDS pricing more transparent and market driven, and help develop more sophisticated savings and investment products. In his message to the conference, DFID economist Alan Whitworth found poor tax collection as a major reason behind fiscal deficit that leads to a rising level of public debt.
Sharing the results of his research, Dr Haider Mahmood said the fiscal policy of a country is essentially constrained by requirements to finance the public deficit. It means that in the long-run the market value of government debt must be equal to present value of the entire discounted upcoming budget surpluses. PRIME''s Associate Fellow, Juvaria Jafri, was of the view that external debt is complicated by the fact that much of the foreign debt is owed by the public sector, whereas export earnings and an important part of foreign assets are owned by the private sector.
Ali Khizar said that the PML-N government should concurrently design policies to diversify exports and introduce new avenues of exports through fiscal incentives. Participating in the panel discussion, Dr Tariq Mahmood said that external debt seems to have retarded growth during the period of study when external debt to GDP ratio alone is considered in the growth regression. His study further suggests that for a given amount of total external debt, a heavier reliance on bilateral rather than multilateral debt needs to be decreased as it tends to retard economic growth.
Arshad Zuberi, Deputy Chief Executive of Business Recorder, who chaired technical sessions as well as opening and concluding session, stated that it is not the question of rise in debt every year; but what really matters is how the government manages debt servicing. He added: "We would like to hear what is the way forward proposed by the participants of the conference in the present situation."
Head of Karachi Stock Exchange, Nadeem Naqvi, and head of a commercial bank, Shahzad Dada also participated as panelists. PRIME''s Executive Director Ali Salman said that the National Debt Conference (NDC) has been organised to raise awareness amongst parliamentarians, policymakers, general public and other stakeholders about the rationality and consequences of an increase in public debt and its structure for our economic freedom; and to arrive at policy suggestions that improve our management of national debt.
The Debt Conference''s concept note says that increased level of public debt poses significant risks to economic freedom which is curtailed as more debt is followed by more debt servicing, which is often financed by taxation or simply by more debts. Thus new taxes are imposed as a means for debt servicing or worse money printing is adopted. The speakers at National Debt Conference also included resident representative of Friedrich Naumann Foundation Dr Almut Besold.