According to a Business Recorder exclusive, the federal government is considering floating bonds (Eurobonds and sukuk) in the international market to strengthen the declining foreign exchange reserves (plummeting to 13.8 billion dollars by September 2017) as well as keep the budget deficit at sustainable levels. The exact amount, the report adds, would be determined subsequent to assessing the market's response after road shows. The budget for the current fiscal year envisages 105 billion rupees of sukuk bonds while Eurobonds were not budgeted; however, Ishaq Dar during his current tenure has understated equity borrowing in his budgets and issued bonds/sukuk as and when it was feared that the budget deficit was reaching unsustainable levels.
There are two factors that one would hope are taken into account while determining the amount of bonds issued this time around. First and foremost, there is a need to decide an annual interest payment which is competitive in the global market. During the past four years, whenever Eurobonds or sukuk were issued the interest rate was well in excess of what was available from bonds issued by countries much more heavily indebted than Pakistan, for example, Greece. Thus while Pakistan offered 8.5 percent on a 10-year Eurobond and 7.5 percent on a five-year Eurobond Greece was offering around 5.6 percent for 10-year bond. Sukuk was issued at 6.5 percent which was hailed as indicative of Pakistan's improved standing; however, this too was one percent higher than what was offered by Greece. The high rates agreed by Pakistan led to the issue being over-subscribed which in no way reflected the improved state of the economy, as claimed by Dar at the time, but of a rate of return that was higher than what was available on the market at the time, and which increased the country's indebtedness.
Secondly, there are frequent comments associated with members of the executive that the government (notably the political leadership) has very little flexibility in reducing its current expenditure given that around 50 to 60 percent is allocated for defence and debt servicing (including repayment of principal as and when due), and 30 percent for current expenditure. On the other side of the coin an increase in revenue generation continues to be from enhancing taxes on existing taxpayers and not from broadening the tax net. The incumbent government is relying increasingly on withholding taxes in the sales tax mode which implies higher indirect tax collections which are passed on to consumers and whose incidence on the relatively poor is higher than on the rich. The widening differential of withholding taxes payable by filers and non-filers implies that those who file income tax returns are forced to pay this tax in addition to the income tax (normally cut at source) while the non-filers only pay this tax while refusing to file their returns.
There are however several options available to the government within the existing expenditure constraints as well as its revenue base. The extent of corruption/mismanagement/irregularities identified in all government - civilian and military - institutions is extremely high, in trillions of rupees in some sectors, notably power sector, and for evidence one has to only look at the Auditor General's reports which focus on less than 10 percent of all departments/divisions accounts. There has been no effort during the 70-year history of this country to hold this appalling performance in our institutions to account or to make efforts to combat the extent of this malaise. All public sector recipients of government funding should volunteer belt tightening from henceforth.
Equally importantly, there is a need for parliament to discuss the rising wage bill, with a 10 percent annual increase the norm, even when inflation is a lot lower, because that in itself is becoming unsustainable. Dar during his first year did attempt to freeze wages but was severely attacked by the opposition, including the Pakistan Tehreek-e-Insaf. It is necessary to contain the rise in the wage bill. And the revenue base needs to be expanded by widening the tax net, not by taxing the existing taxpayers.
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