'The debt debate'

Debt Policy Co-ordination Office (Finance Division)This is with reference to opinion piece titled "The debt debate" carried by Business Recorder on 03.02.2017. The said article needs certain clarifications as under:
- The present government has taken drastic steps to bring down the fiscal deficit from 8.2% of GDP in 2013 to 4.6% of GDP in 2016. This has been achieved by exercising restraint in overall expenditure yet not compromising on the development expenditure. The reduction in fiscal deficit has considerably slowed down the pace of debt accumulation.
-- The opinion piece states that the government is in violation of Fiscal Responsibility and Debt Limitation Act, 2005 by extending sovereign guarantee and contingent liabilities of over 3 percent of GDP against the limit of 2 percent fixed in the Act. Further, it states that the government guarantees were recorded at 2.4 percent (Rs 800 billion) of GDP in June, 2016 and presently recorded at 2.7 percent of GDP against the limit of 2 percent. The opinion piece also states that if power sector circular debt and commodity financing are included, the contingent liabilities are Rs 2,000 billion and these are not reflected in the budget or public debt. However, all these statements are incorrect with respect to public debt/contingent liabilities as per the details below:
-- First of all, it is to be noted that Fiscal Responsibility and Debt Limitation Act, 2005 specifies separate thresholds for public debt and contingent liabilities. Further, International Accounting Standard (IAS) 37 states that the contingent liabilities should not be recognised as liabilities until they are called. Therefore, contingent liabilities are not added to the overall debt of the country;
-- Fiscal Responsibility and Debt Limitation Act, 2005 specifies an annual limit of 2 percent of GDP on new issuance/rollover of existing guarantees. This limit is not applicable on the stock of government guarantees. During 2015-16, the government issued fresh/rollover guarantees aggregating to Rs 191 billion or 0.6 percent of GDP, while, outstanding stock of government guarantees as at end June, 2016 amounted to Rs 721 billion. Therefore, the government was not in violation of Fiscal Responsibility and Debt Limitation Act during 2015-16 with respect to issuance of government guarantees;
-- Guarantees issued against commodity operations are not included in the stipulated limit of 2 percent of GDP as the loans are secured against the underlying commodity and are essentially self-liquidating and thus should not create a long-term liability for the government.
-- The opinion piece incorrectly states that there is a danger of default on account of external debt which has been increasing for the last three years and was $74 billion till June 2014. In fact, external public debt was recorded at $51.3 billion as at end June, 2014;
-- The opinion piece incorrectly states that country's external debt is projected to swell up to $110 billion till 2020based on estimation of self-proclaimed debt analysts. The said economists had previously made many such false projections in the past such as "economy slipping into deflation" which did not materialise. In fact, the real economic growth has continuously gained momentum in last three years along with the contained inflation which is an ideal situation for developing countries like Pakistan. Encouragingly, GDP growth rate of Pakistan is higher during past few years as compared with the global GDP growth rate. Most importantly, the twelfth and final review of IMF, which conducted a thorough analyses on the economy of Pakistan, projected that the external public debt would be around $62 billion by 2019-20from its present level of $57.7 billion in four years' time indicating annual growth of below 2 percent. In fact, IMF recent debt sustainability analysis shows that external debt would remain on a downward trend over the medium term, with the peak in external financing needs under the most stressed scenario (3.7 percent of GDP) staying well below the risk assessment benchmark of 5 percent of GDP. Further, credit rating agencies in their recent reports acknowledged this fact that Pakistan external debt is on sustainable path and there is very little exposure to medium term vulnerabilities;
-- The opinion piece also incorrectly states that Pakistan's external debt to export ratio has been projected at 441.8 percent by 2019-20. In fact, if the writers would have referred IMF Latest Staff Report on Pakistan carefully, they would have a better idea that IMF has projected external debt to export ratio at 243 percent during 2019-20. Similarly, external financing requirement of $22.5 billion by 2019-20 is totally baseless and incorrect especially given the fact that export promotion is one of the top priorities of the government and the government has taken several measures recently to boost exports.
-- The opinion piece incorrectly states that commercial borrowings are 25 percent of the external debt. In fact, commercial loans only accounted for 3 percent of external public debt as at end September, 2016. Even if issuance in international capital markets are considered, the share of commercial borrowing (commercial banks & Eurobonds) accounted for 11 percent of external public debt as at end September, 2016;
-- The opinion piece mentions that Pakistan's total debt stood at Rs 22.5 trillion at end June, 2016 while deliberately ignoring the components making up this number which are as follows:
-- Out of this total, net public debt stood at Rs 17.8 trillion;
-- Total external debt and liabilities of the country includes debt of other sectors which by definition are not public debt since the government is not liable to pay these obligations such as private sector debt and bank borrowings etc.;
-- The cumulative number also include domestic and external debt of PSE's, loan against commodity operations etc.;
-- The opinion piece also criticizes the definition of public debt. It is to be noted that the government uses the definition of public debt that is approved by the parliament by amendment in Fiscal Responsibility and Debt Limitation Act as previously it had not defined public debt explicitly.
-- The opinion piece presented various debt numbers out of which mostly are incorrect. Further, it is to be noted that the debt burden is only understood in comparison to its relation with the GDP. The analysis of public debt to GDP ratio during last 15 years reveals that in the period of high inflation, public debt to GDP ratio performed relatively better as the denominator becomes larger and this ratio mostly hovered close to 60 percent even when real GDP growth was merely half a percent. For instance during the tenure of previous government (2009-2013), the average inflation remained around 12 percent while real GDP was 2.8 percent. Whereas, during the tenure of present government, the average inflation remained around 5 percent while real GDP was over 4 percent. The higher inflation could help reducing the public debt-to-GDP ratio yet it has other adverse repercussions for the economy. Therefore, economic managers would always prefer high real GDP growth coupled with low inflation rather than low real GDP growth coupled with high inflation. Another way to gauge the increase in public debt burden of the country is to compare that with relevant global public debt statistics. There was no increase in Pakistan's net public debt to GDP ratio during last three years which remained at 60.2% from 2013 to 2016 while global debt to GDP ratio increased by 6.8 percent during the said period (IMF World Economic Outlook, October 2016).
-- The opinion piece made a naïve statement that Debt Policy Co-ordination Office which was setup under Fiscal Responsibility and Debt Limitation Act, 2005 has chosen to remain silent on public debt matters. In fact, the Debt Policy Co-ordination Office is actively involved in debt management of Pakistan by publishing periodic reports such as debt policy statements, fiscal policy statements, execution and implementation medium term debt management strategy, risk management reports and plays advisory role in debt management operations including both domestic and external loans.
-- The opinion piece incorrectly states that external debt servicing is the main concern in the wake of unprecedented rise in the volume of foreign loans since 2008. In fact, there is limited pressure from external debt repayments in the medium term. Projected principal repayments to the IMF against Extended Fund Facility (EFF) are stretched over a longer timeframe, starting at US $0.2 billion in 2018 and rising to US $0.8 billion in 2020, with the final payment due in 2025. An amount of US $0.75 billion due in June 2017 is the only Eurobond maturing until 2019. Repayments for Official Development Assistance from the Paris Club began in 2016, but payments are spread over a 23-year period.
-- In fact as highlighted by the finance minister in his article that net external indebtedness of the country has actually declined / improved by US $4.5 billion during the last three years thus such notions are totally unfounded.
The opinion piece quotes various existing publications of self-proclaimed debt analysts against which Ministry of Finance has already published various rebuttals/rejoinders in the past. The above facts clearly establish the fallacious views mentioned in the opinion piece regarding the state of public debt management in Pakistan. The present government has made remarkable and sustained gains in improving the fiscal and debt risk indicators.