Pakistan’s debt mountain
Muhammad Jamil


The most serious aspect of our dire economic situation is the growing debt that limits the fiscal space to invest in human development and infrastructure. The reason behind the piling up of Pakistan’s debt is that we spend more than we earn, and we import much more than we export. Public debt increased from Rs 800 billion in 1990 to Rs 3,000 billion in 1999 while external debt doubled from $ 20 billion to $ 40 billion in 1999. As a result, 60 percent of total revenues are allocated for debt servicing alone, leaving little for investment in social and economic development. During Musharraf’s era — from 1999 to 2007 — there was no increase in external debt, which remained static at $ 39 billion but from 2008 to 2013 the external debt increased from $ 39 billion to $ 54 billion, an increase of $ 16 billion during the PPP’s five-year term.

Pakistan’s public debt stood at Rs 6.3 trillion in 2008 and today it stands at Rs 17 trillion, which means that public debt has increased by about three times in the last eight years. One-third of this debt is foreign while the other two-thirds is domestic. An analysis of all IMF reports released in the past two years revealed that the agency’s latest debt projections for 2015-2016 were higher when compared to the estimates given in its first report, which was the base for signing the three-year $ 6.2 billion bailout package in September 2013. The IMF had then projected Pakistan’s external debt would increase to $ 58.6 billion by 2015-2016 but now it is more than $ 65 billion, which is likely to increase by the end of the current fiscal year. This is despite the fact that Pakistan has benefited enormously from declining global crude oil prices otherwise the situation would have been even more dismal.
The newly formed monetary policy committee of the State Bank of Pakistan (SBP) decided on Saturday to keep the benchmark interest rate unchanged for the next two months. Announcing the decision of the monetary policy committee at a press conference, SBP Governor Ashraf Wathra said, “The real GDP is set to maintain last year’s growth momentum. The SBP expects average inflation in 2015-2016 to remain between three percent and four percent in view of a benign outlook of global commodity prices, expectation of a moderate pickup in domestic demand and further ease in supply-side constraints like energy shortages.” Basking in the glow of relief due to collapse in global oil and commodity prices, the SBP had brought down the policy rate by 300 basis points in 2014-2015. It had further reduced the target rate from 6.5 percent to six percent in its September 2015 announcement.
However, Ashraf Wathra added that Pakistan’s declining exports are reflective of a worldwide phenomenon: price is a function of production. How will exports increase if there is no surplus production to begin with? The question is why Pakistan has not been able to have a favourable balance throughout the history of Pakistan, except once during the Korean War and a second time in 1973 during the oil crisis? The government must find ways and means to increase production by ensuring the supply of electricity. This means the government should focus on projects for generation of electricity that reduce the cost of energy. For their part, trade and industry should resort to innovative marketing policies, look for non-traditional markets and try to increase the exports of value-added products to overcome the trade deficit. How unfortunate that even remittances of $ 20 billion by expatriate Pakistanis do not help overcome the current account deficit.
It is common knowledge that for higher growth there has to be a substantial increase in investment. But the present rate of savings to GDP is around 14 percent, which is lower if compared to developing countries and emerging economies around the world. In the region, savings to GDP ratio in India, Nepal, Bhutan and Bangladesh is more that 30 percent. Although the government claims that the inflation rate is 2.2 percent at present, during the last six months the prices of pulses have increased from 30 percent to 50 percent, and the utilities tariff, apart from an increase of Rs 40 billion in taxes, have had adverse impact. The problem is that inflation hinders the capacity to save. It was due to the accumulation of the debt mountain that Pakistan had to allocate more than Rs 1,100 billion for debt servicing alone.
The threats faced by Pakistan have to be understood in the light of the fast changing regional and international situation, which add urgency to reviving the economy so that adequate resources can be allocated to defend Pakistan’s integrity and sovereignty. It is painful to note that except proverbial exception, almost every government in the past took loans by accepting and complying with harsh IMF conditions. Increase in the rates of utilities produces ‘the multiplier effect’ leading to cost-push inflation making it impossible for local producers to compete in the world market. But this crisis is of our own making, as corruption has eaten into the vitals of the nation. The government should therefore restructure public sector enterprises because on the average these state enterprises are causing a loss of more than Rs 500 billion per year.
Almost Rs 1,000 billion per year is lost due to wastages, mismanagement and corruption. If the government feels that it cannot make public sector enterprises profitable, then it should privatise them through a transparent mechanism. Last but not least, imports should be rationalised so that foreign exchange is not wasted on non-essential imports. To avert economic disaster, the government must show zero-tolerance towards corruption, tax evasion, wastages and mismanagement in public sector enterprises. It should learn to live within its means and reduce non-development expenditure by curtailing the perks and privileges of cabinet members and parliamentarians. In the past, in a quest to balance the budget or to keep the fiscal deficit within reasonable limits, the axe always fell on development expenditure. If this happens, Pakistan will not be able to build infrastructure for further development and industrialisation to generate employment opportunities.