The evidence from scientific literature on Pakistan explains that the single most important determinant of debt burden in Pakistan remained the ever out-of-control fiscal deficit i.e. the difference between government’s revenues and expenditures. Pakistan’s total debt and liabilities now stand at 79 percent of our national income. Almost 60 percent of this is domestic debt while almost 35 percent represents external debt and liabilities of the government, private sector and public sector enterprises. Servicing of this debt i.e. making the payments on the principal and interest of outstanding loans eats up almost 36 percent of the entire revenue collected by the government. In monetary terms Pakistan’s total external debt and liabilities had reached $ 83 billion at the end of the previous fiscal year, representing an annual increase of $ 9 billion.
The State of Pakistan’s Economy report, by the State Bank of Pakistan, highlights that 88 percent of the above-mentioned increase was in the last quarter of fiscal year 2017 mainly due to the economy’s urgent debt procurement from China (in form of loans) and commercial banks.
It may also be noted that during the fiscal year 2017 most of the external borrowing was procured at floating interest rates. Intuitively, any rise in the proportion of floating debt implies greater vulnerability with respect to movements in global interest rates. With foreign exchange reserves not growing at a rate envisaged in the macroeconomic framework, developed by the Ministry of Finance in fiscal year 2015, another concern, therefore, is the short-term nature of current debt. A significant portion of these loans will mature within a period of three years from now and with non-debt external inflows not increasing this could bring further bad news for the deteriorating balance of payments.
We also know from the recent data that all solvency indicators of external debt sustainability have worsened during fiscal year 2017. This among other reasons is attributed to an increase in borrowing from external sources, falling foreign exchange reserves, and increase in debt servicing.
The good news is that Pakistan has a debt management strategy, prepared by the Ministry of Finance. The real question now is if this strategy is really delivering? The main objectives of this strategy include “covering the government’s financing needs and payment obligations, while minimizing medium and long-term costs; minimizing the risks of the government public debt portfolio; and facilitating the development of domestic debt market.”
Against these objectives let us now turn to the outcomes from the recent economic performance. The country’s inability to manage the growing fiscal deficit is resulting in fast growing share of short-term debt, which now stands at 31 percent of total public debt. Lenders are not much interested to lock themselves into longer-term offerings primarily due to unattractive interest rate, expected inflation, rising current account deficit, and uncertainty facing the future of economic policy in an election year. While the federal government likes to separately exhibit the debt of public sector enterprises, however, this is indeed backed by a government guarantee, which on several occasions results in loss to the exchequer.
Contrary to the objectives of debt management strategy, the debt market still has a very low participation of new players. For example, 90 percent of the T-bills – debt instrument issued by the government through the State Bank of Pakistan via auction - is held by the commercial banks. The non-bank institutions still remain reluctant to trade in debt instruments on a large scale. More recently a declining interest was seen in the case of corporate investments and mutual funds. While the insurance sector did see a promising growth during fiscal year 2017, however, its investment in long-term debt instruments has not increased.
The debt management system in place at the Ministry of Finance also needs to be strengthened. We now understand that the inability to appropriately forecast deficit financing needs resulted in the federal government borrowing more than its requirement during fiscal year 2016. This borrowed sum was then kept in various banks at the prevalent interest rate, which was lower than the cost of borrowing. So who exactly is responsible for incurring this loss?
I am a policy researcher and certainly not trained to blame entities or individuals. Therefore I shall try finding the answer to this question in the law that regulates debt management and the underlying Rules of Business of the Government of Pakistan, which support the implementation of this law.
The primary of these laws to regulate debt in Pakistan is the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005. Unfortunately, this law was not able to deliver due to the weak demand and supply side accountability measures, which should be part of this law. On the supply side, we understand that the parliament could only weakly challenge the amendments twice brought on the floor for amending this act through use of another act i.e. Finance Act 2017. The latter was helpful for the government as the upper house of the parliament lacks the powers to vote on a finance bill.
The role of parliamentary oversight is extremely important here however during the whole of last year, there was only one full dedicated day which the Senate Standing Committee on Finance devoted to discussing Pakistan’s debt. I have my doubt that the time devoted by National Assembly Standing Committee on Finance would even account for a single full day. Due to the weak accountability governing the FRDL Act, any government now has the ability to change the definitions of basic debt accounting concepts including the overall definition of public debt. In short, this act is a loose piece of legislation due to the ease with which it can be manipulated.
The above-mentioned situation analysis is not specific to the current government. Most governments in the past have shown weak resolve to streamlining debt management in Pakistan. One could look at the economic chapters of the manifestos of any mainstream political party. It just seems that the subject was too technical for the economic thinkers within these political parties due to which in the overall envisioned macroeconomic management, a scarce space is given to the remedial measures for debt dilemma.
Most administrations once in power also appreciate the fungibility of debt in Pakistan. At times, even the external debt liability is also regarded fungible i.e. ability to use debt for purposes other than what it was actually meant for. This is an important issue as we are now being blamed by the United States - telling us that the US assistance to Pakistan, whether military or nonmilitary, was transformed into fungible assets with very little impact on public spending - aimed at the welfare of the people of Pakistan. The poor allocation of previously procured debt has also weakened the confidence of potential lenders.
Such practices coupled with uncertain political environment weaken Pakistan’s position in international debt markets. Resultantly, we end up with poorly negotiated debt arrangements, which bite harder under a weak balance of payments position in turn also affecting the future creditworthiness of the economy. In my recent interaction with a key donor country representative, I was asked why is there no legal or regulatory mechanism to stop the government from not pursuing public programmes that don’t deliver and in the end balloon the fiscal deficit? Currently, according to the Public Accounts Committee, there are over 1,000 projects in the public investment portfolio, which are running a cost and time overrun.
The way forward may be found in a very comprehensive report which was prepared by the Debt Reduction and Management Committee in 2001. The report called for going back to the basics and the overarching message was not to make debt a pillar of public finance needs rather “reduce the rate of future borrowing by reducing the fiscal and current account deficits, and reducing the large losses of state-owned enterprises that augment the budget deficit”. The committee had also provided specific suggestions on “improving the effectiveness of government expenditures especially the use of borrowed resources.” Also, the committee had called for “monitoring systems to effectively review and monitor progress on debt including on contingency management in the context of a rolling medium-term macroeconomic framework.” Unfortunately, we today work with three different macroeconomic frameworks in Pakistan leading to a lack of shared vision within the economic management institutions. The recommendations also suggested that optimal debt stock should be in line with economic growth requirements. Such optimization analysis is not being done on a regular basis by any of the three institutions (Ministry of Finance; Ministry of Planning, Development and Reforms; and the State Bank of Pakistan) that prepare these macroeconomic frameworks.
Finally, demand-side accountability is also important for future regulation of debt in Pakistan. The Open Government Partnership which is a multilateral initiative to promote transparency brings governments and citizens together. Pakistan has twice missed the deadline to submit its commitments under the OGP. The current government can demonstrate a bold stance by committing to form a Steering Committee having participation of government and independent experts to oversee Pakistan’s debt management.
Ahmed is the Deputy Executive Director of the Islamabad-based Sustainable Development Policy Institute.
The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of Geo News or the Jang Group