Debt trap ahead
The Financial Express.
The rhetoric deployed by Pakistan Tehreek-e-Insaf’s (PTI) chief Imran Khan while in opposition – and which was repeatedly flashed through media – was about unsustainable ‘public debt’. Interestingly, he continued speaking along such lines even after occupying the office of prime minister in August 2018, perhaps to divert public attention from his party’s incompetence, poor governance and anti-public policies which have become evident since the PTI came to power.
All over the world public debt is discussed with reference to its percentage to Gross Domestic Product (GDP) of the country, as it is more meaningful and relevant in the economic context. But Khan always chose to ignore this important fact and, by doing so, has created a poor image of Pakistan across the world with regards to its public debt.
As per the Fiscal Responsibility and Debt Limitation Act (FRDLA), the total public debt is defined as the debt of the government (including the federal and provincial governments), government deposits with the banking system, serviced out of the Federal Consolidated Fund (FCF) account and the debts owed to the International Monetary Fund. The inclusion in the total public debt of liabilities relating to private sector’s external debt, Pakistan Stock Exchange’s debt, commodity operations’ borrowing and inter-company external debt from direct investor abroad is not as per law, as repayments of these items are not to be made by the federal government out of its FCF account with the State Bank of Pakistan.
During Musharraf’s government between 1999 and 2008, the gross public debt increased by 97 percent to Rs5,800 billion; in PPP’s tenure (2008-13) it increased by 146 percent to Rs14,292 billion and the increase in PML-N’s tenure 2013-18 was 75 percent to Rs24,952 billion. However, in the first four years of the PML-N tenure to June 2017, the increase was only 50 percent, to Rs21,409 billion. This was mainly because the government had imposed strict fiscal discipline and undertaken a number of austerity measures, including abolition of discretionary funds of the prime minister and the ministers. The said increase of 50 percent in public debt during 2013-17 was also after financing the extraordinary security-related expenditure for wars against terrorism (Zarb-e-Azab and Radd-ul-Fasad) and heavy investment in public sector development projects with a clear focus on elimination of gas and electricity load-shedding from the country, construction of motorways and highways, investment in information technology and communication sectors.
The jump in public debt from 50 percent to 75 percent (2017-18) was due to the economic instability which followed the political instability caused by the disqualification in July 2017 of prime minister Mian Nawaz Sharif, and fuelled by unbudgeted financial demands leading to collapse of the fiscal discipline that had been painstakingly nurtured and preserved in the first four years of the PML-N government.
Despite all the odds, gross public debt increased by Rs10,660 billion to Rs24,952 billion during PML-N’s years in government and the GDP of Pakistan grew by 54 percent from Rs22,386 billion to Rs34,397 billion in the same period. Gross public debt as percentage to GDP increased during PML-N’s tenure from 64 percent (2013) to 72 percent (2018). There were cash deposits of Rs1,901 billion of the government with the banking system and when these were deducted, as per FRDLA, from gross public debt of Rs24,952 billion, the total public debt was Rs23,051 billion, or 67 percent of the GDP. In the year 2018, the public debt percentage to GDP of Japan was 237 percent, Italy 132 percent, USA 104 percent, Belgium 102 percent, France 98 percent, Spain 97 percent, Canada 90 percent, Brazil 88 percent and United Kingdom 87 percent which all were far too above that of Pakistan’s.
Imran Khan always preferred to quote ‘total debt and liabilities’ numbers which stood at Rs29.9 trillion end June 2018, and which shot up to Rs44.5 trillion in just the first two years of PTI government, indicating an increase of Rs14.6 trillion or 49 percent. This increase in PTI’s two years almost matches the increase in total debt and liabilities during PML-N’s five years to June 2018. External debt, included in aforesaid total debt, was $70 billion, with liabilities $95 billion end June 2018. These swelled to $113 billion end June 2020; showcase deposits of $7 billion from Saudi Arabia, UAE, Qatar and China have not been included in the said figure of $113 billion as they are treated as direct liabilities of SBP.
More serious worry is peaking of total debt and liabilities to GDP ratio from 86.8 percent (June 2018) to alarming 106.8 percent (June 2020) – which is the highest in the last two decades. Excluding liabilities, the gross public debt of Rs24.9 trillion as on June 30, 2018 has gone up by Rs11.6 trillion to Rs36.5 trillion in two years, indicating a surge of 46 percent, with debt/GDP ratio climbing from 72 percent to 87 percent, in two years to June 2020.
It is time to remind the prime minister of his pledge to the nation before the general elections: that if his party was brought to federal power corridors, he would reduce public debt and liabilities by Rs10 trillion. The reality on the ground is completely opposite as the nation’s public debt and liabilities figure of 71 years has ballooned by whooping Rs14.6 trillion in a short span of two years of PTI’s government. Unfortunately, public debt projections for 2018-23, so far officially shared by the PTI government with the international financial institutions (IFIs), indicate doubling of public debt during this period. If this trajectory continues and the said projections materialise, the PTI will land the country into an unprecedented ‘debt trap’ which will be an uphill task for any future government to undo. Can all on the same page with PTI see the disaster Pakistan is heading towards under the incumbent government?
(The author, a UK Fellow Chartered Accountant, is former Finance Minister of Pakistan and former Leader of Opposition in the Senate of Pakistan)