Addressing a meeting on debt issues on 4th August, which was also attended by Prime Minister Shaukat Aziz and top officials of the Ministry of Finance, President Pervez Musharraf made very pertinent remarks about the country's debt profile and strategy. He appreciated the decline in Pakistan's debt burden in the last six years and underscored the need for devising a borrowing strategy which was need-based and its positive effects were visible on the ground.
While the debt burden was approaching sustainable levels, the policy makers must not lower their guard and continue to perform well because it takes no time to slide back. The country's borrowing requirements should be reviewed on quarterly basis and the ongoing and under-process projects should be analysed to see how far they fit into the context of the government's reforms and development priorities.
The President also stressed the need to continue to maintain macro-economic stability and follow the path of structural reforms. The ultimate objective, however, should be to bring about a qualitative improvement in the lives of ordinary people.
The Prime Minister pointed out that the country had progressed from insolvency to stability in the last six years and assured that, despite significant improvement in debt indicators, there was no complacency on the part of the government.
In this context, Parliament had already passed a fiscal responsibility and debt limitation law in order to maintain fiscal discipline. Economic Advisor Ashfaq Khan emphasised that borrowing domestically or from abroad is a normal economic activity as long as the borrower can earn higher economic/social returns than the cost of borrowed funds.
Problems arise when the debt carrying capacity of the country does not increase commensurate with the increase in its debt servicing liability.
The essentials of country's debt reduction strategy include lowering of twin deficits (fiscal and current account), reduction in the cost of borrowings, raising economic growth and fiscal revenues, Paris Club debt-reprofiling, borrowings only on concessional terms, tapping resources from international capital markets to diversify resource inflows and pre-payment of expensive loans.
Comparing debt ratios like external debt as a percentage of GDP and foreign exchange earnings as a percentage of external debt and liabilities, the Economic Advisor tried to show that the government had succeeded in reducing the public debt burden of the country sharply.
What was said at the meeting cannot be disputed so far as basic principles of debt strategy are concerned. Nevertheless, it seems that the President was somewhat apprehensive about the emerging debt scenario and strategy and wanted to convey the right message at the right time. Although he is not an economist, he is sagacious enough to realise that excessive borrowing could lead to undesirable consequences and push back the country to a stage where debt servicing could again become a major problem.
His apprehension, in our view, is valid to a certain extent. Debt servicing liability of the country had declined during the recent years due mainly to debt rescheduling and reprofiling under the Paris Club, debt write-offs, decline in interest rates and sharp improvement in the current account of balance of payments largely as a result of huge inflow of remittances, etc, but these factors could only occur and combine once in a while and are not usually permanent in nature.
In fact, the current account during 2004-05 has already turned negative after registering surpluses in the last four years. According to the latest Economic Survey, total external debt and liabilities rose from $35.26 billion in June, 2004 to $36.62 billion at the close of March 2005, indicating an increase of $1.36 billion or 3.9 percent during this period.
So far as domestic debt is concerned, it would also continue to increase unless and until fiscal deficit of the country is eliminated, which appears improbable at the moment. Obviously, the government has to borrow from some source to meet this deficit.
Economic managers of the country continue to quote debt and debt servicing liability in terms of percentage of GDP, etc - which is not a correct approach - but are generally reluctant to mention undesirable features like the aggregate level of debt. Another unhealthy aspect is that provincial governments are still obliged to pay high interest rates prevailing in the past on their loans.
This benefits the Federal Government but continues to add to the debt burden of the provincial governments. It is time that provincial governments were also provided some relief in debt servicing cost to improve their finances.
The Economic Advisor of the government is right in saying that borrowing as such is not a bad proposition if the borrower can earn higher economic/social returns than the cost of borrowings, but the question is whether anybody in the government has carried out an exercise to compare borrowing costs and returns.
There is a general perception in the country that a large part of government borrowings has been squandered on unnecessary projects or gone to waste and fed the monster of corruption, but the burden of these borrowings has to be borne by ordinary people of the country. An army of ministers and advisers at the centre and in the provinces and increasing perks and privileges to the members of assemblies are also a cause of concern to the people.
We do not want to comment on this issue further, but feel that the President has set out the guiding principles of debt strategy and the Prime Minister and his team should try to seriously think about improving the situation and showing better results. No doubt the present economic team has done a good job but there is always room for improvement.