This is apropos finance minister Ishaq Dar's article 'Public debt management' carried by the newspaper on Saturday. Good public debt management contains financial risk. It develops domestic debt market and helps in reducing the borrowing cost. Such an approach facilitates maintaining financial stability and helps to develop in strengthening domestic financial system.
But the key to effective management of public debt for low income country like ours differs from what is practised in developed countries, as "Cookie Cutter" approach will never be helpful. It is required that debt management strategy should support overall Macroeconomic Policy framework to maintain stable conditions that should be conducive to growth.
What is Pakistan's approach to managing its public debt? There is almost zero policy co-ordination between State Bank of Pakistan and Ministry of Finance. Former Governor SBP Shahid Hafiz Kardar having no real banking sector experience, as his past affiliation with Royal Bank of Scotland is nothing quite credible.
Soon after taking the charge he decided to quietly wind up SBP Debt's Cell for reasons best known to him. The decision was gruesome for Pakistan's sovereign debt market, as the objective of the guidelines of debt cell is to always assist policymakers to consider reforms to strengthen the quality of the Public Debt Management and reduce country's vulnerability to financial shocks and all shortcomings. Sovereign debt is vital for the development of a credit market. Active credit market assists issuance of Sovereign Debt.
Unfortunately, however, Kardar's replacement was another bad choice for the market as Yasin Anwar being a stranger had no idea about Pakistani market and norms.
The incumbent SBP Governor, Ashraf Wathra, is a professional banker and is certainly a better choice; he has effectively managed exchange rate and inflation/policy rate. He may not be the best, but his decision on implementing financial and price stability is appropriate in meeting the required standards. In recent times market has witnessed SBP's influence over exchange rate policy and setting of objectives for both monetary and exchange rate policies.
His contribution towards Real Economic Growth is below the desired level. This could be due to excessive pressure from Ministry of Finance to encourage banks to invest in government securities, which in proportion to bank deposit is the highest in the world.
Let's do a case study and dig deeper to find the truth. There are quite a few monetary angles which need to be discussed more in detail.
Here are some glimpses of past and present data that should help:
-- The size of economy in 1999 was USD 75 billion, in 2008 it was USD 170 billion and in 2015 USD 271 billion.
-- In 1999, GDP Growth was 4.2 percent, in 2008 6.8 percent and in 2015 4.2 percent
-- In 1999, inflation was 5.7 percent, in 2008 7.8 percent and in 2015 below 3 percent
-- In 1999, fiscal deficit/GDP was 5.1 percent, in 2008 4.2 percent and in 2015 5.3 percent (FY15)
-- In 1999, Rs/DLR parity was 51.90, in (FY 2008) 67.20 and 104.65 (current).
-- GDP per capita income in 1999 was USD 450, in 2008 USD 1085 and in 2015 USD 1513.
-- In 1999, tax revenue was Rs 391 billion, in 2008 Rs 990 billion and in 2015 Rs 2.588 trillion.
-- Exports in 1999 were to the tune of USD 7.8 billion, in 2008 USD 19.22 billion and (FY15) USD 24.087 billion.
-- Imports in 1999 were worth USD 9.9 billion, in 2008 USD 39.996 billion and in FY15 USD 41.309 billion.
-- Foreign Direct Investment in 1999 was 472 million, in 2008 USD 5.19 Billion and in 2015 USD 2.767 billion.
-- Total debt (external and domestic) in 1999 was Rs 2.907 billion, in 2008 Rs 6.475 billion and in 2015 Rs 18.467 billion.
-- Interest payments on debt in 1999 were Rs 340 billion, in 2008 Rs 642 billion and in Rs 2015 Rs 1.284 trillion.
-- The size of PSDP in 1999 was Rs 80 billion, in 2008 it was Rs 550 billion and in 2015 Rs 700 Billion.
-- Foreign exchange reserves in 1999 were USD 991 million, in 2008 was USD 16.5 billion and in 2015 USD 18.699 billion
-- Expenditure on education/GDP in 1999 was 1.82 percent, in 2008 2.43 percent and in 2015 was 1.78 percent.
-- Total deposits of scheduled banks in 1999 were Rs 1.113 trillion, in 2008 Rs 3.8 trillion and in 2015 Rs 9.305 trillion. `
-- Total advances of scheduled banks in 1999 were Rs 1.533 trillion, in 2008 Rs 3.271 trillion and in 2015 Rs 4.781 trillion.
-- Credit to private sector in 1999 was Rs 84.4 billion, in 2008 Rs 370 billion and in 2015 Rs 212 billion.
-- Banks Weighted Average Lending Rate in 1999 was 14.6 percent, in 2008 10.32 percent and in 2015 8.7 percent.
-- Excessive borrowing to meet External Financing without a payment plan confirms a lack of strategy.
-- Where have the USD 13 billion oil savings disappeared - a point not discussed by finance minister Ishaq Dar in his article?
-- A 3-6 percent exchange rate moving either way is a common phenomenon in the international market. This type of move in major currencies occurs in a single day.
However, the cause of fall was caused by demand to honour trade commitments (Oil & MOD payments). Speculators took advantage of the situation and jumped in a bandwagon, which is not interbank market responsibility. Exporters - like ever - became greedy and were holding foreign exchange in a hope to make a quick buck.
Since SBP was defending Fx Reserves through verbal intervention, it did not prove to be a very effective tool, as US dollar liquidity dried up. Instead, a bad precedent was set when FE 25 US Dollar Deposit, which is FC Depositors money, was used to settle payments. And lastly the credit for effectively managing exchange rate goes to SBP and MoF. Islamabad is not supposed to interfere in SBP's affairs.
-- The cost of shift of Government Paper from shorter maturities to longer maturities was too high a price that taxpayers have to pay. PML (N) is in office for the last 32 months. In July 2013, banks' holding of Government Securities (GOP) was Rs 615.5 billion that has surged by Rs 5.423 trillion to Rs 6.039 trillion. To support bank investments in GOP, SBP through its Open Market Operations (OMOs) has injected Rs 1.471 Trillion. The average return on investment ranges well above (2) two percent. Imagine the cost nation has to pay for such types of transactions.
This is why banking sector profit after Tax for 2105 has surged to Rs 199 billion from Rs 166 billion a year earlier. Interestingly, in 2012-13 credit to private sector was a negative Rs 19.2 billion and in FY 2014-15 it was Rs 208.7 billion.
-- Excessive borrowings are done without a payment plan, which is a risky affair for a future elected government. This will cause further embarrassment at the time of maturity because the funds are used for interest payment and not utilised for growth purposes.
-- A large part of revenue collection is based on Customs Duty and Sales Tax on import, whereas country is heavily reliant on indirect taxes. Therefore, talking on this subject is meaningless unless taxes are imposed on all types of Income. We have to bite the bullet on tax reforms.
-- Pakistan's Economic curse is due to policy shift towards banking sector discouraging Banks not to allocate funds for credit expansion. This forceful austerity helps contain Fiscal Deficit at the cost of growth.
-- Credit for higher remittances and containing inflation goes to SBP due to its prudent policy.
-- Rising debt is because of Higher Interest Rate Policy and Extremely High Coupon Rate costing nearly Rs 2 trillion. There is a high price that nation has to pay to bring down the deficit. It also discourages economic activity, resulting in low revenue collection. A fall in banking sector's advance/deposit ratio from 76 percent in 2005 to 51 percent in 2015 will endorse my viewpoint and negate all arguments.
-- Circular debt is a pain in the neck, which cannot be avoided through accounting gimmicks, as there is always alteration cost.
-- About the misconception that the CPEC will not hit public external debt is true. This I have frequently explained in my various write-ups. But then why is government taking credit for major share of USD 35 billion 15-year deal, which is a private sector power generation deal or unless it has secretly provided guarantees?
Pakistan's bad luck is that in an increasingly unstable environment various governments only made efforts to stay afloat through various borrowing techniques. Slow growth and rising debt are the lending agencies' recipe and not a solution to the problem. Emergency measures to bring stability can only provide temporary relief. It's a Never Ending Math Equation unless real income is generated. Therefore the question that begs answer is: Will the economy ever truly recover?
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