CARRYING A MASSIVE DEBT BURDEN
TARIQ AHMED SAEEDI
June 18 - 24, 2012
The government of Pakistan has decided to roll out new short-term certificates and student welfare bonds to raise Rs35 billion to support its budget in the upcoming fiscal year starting from July 1, 2012, according to the media reports. The funds would be used to plug the revenue-expenditures gap and the return on investment restricted to be minimal Rs10,000 for three, six, and 12 months will be attractively net 11.4 per cent per annum.
In view of the size of the federal government domestic debts, evidently, the amount to be generated from these certificates is very paltry. Total domestic debt rose staggering 21 per cent to Rs7.3 trillion until April 2011 compared with six trillion rupees at the end of last fiscal year (2010/11). Not as the same percentage points, foreign debt in rupees term increased 4.4 per cent to Rs4.3 trillion from Rs4.2 trillion in the same period. Pakistan's total debt touched the mark of Rs12 trillion during first 10 months of the outgoing fiscal year, indicating 14 per cent upswing over Rs10.1 trillion at the end of fiscal 2011.
The government has also planned to generate over Rs220 through national saving scheme (NSS).
Market observers said the government is setting stage for investments in its securities by offering attractive returns as well as keeping cut-off yields on Pakistan investment bonds (PIB) at higher side. The tight monetary policy is expected to be there reflecting in high cut-off yields of PIB, said a report by Alfalah Securities Research.
The rollout of short-term certificates and planned fund raising through NSS shows the enthusiasm of the government to hook up with nonbanking sources of funds to reduce fiscal deficit of the next fiscal, which was estimated at 4.7 per cent of gross domestic product (GDP), or approximately Rs1,109 billion.
Analysts termed this as a reconciliatory attempt of the government under foreign debt obligation pressures to appease estranged international monetary fund (IMF) that discontinued the stand-by arrangement sanctioned to Pakistan to avert its balance of payments crisis because of the country's failure to stick on the structural adjustment programme and conditionalities of the lender, one of which was to cut the fiscal deficit. The heavy outflow of foreign reserves on import bill and stuck external flows are making the country reapply for another IMF's loan to meet mainly its foreign debt obligations.
Government borrowing happens to be highly inflationary. As luck would have it, the government loans found their ways into non-productive avenues such as funding of lose making public sector enterprises, remunerations and perks of staff etc.
Subsidies remain important to ensure provision of goods and services to the lifeline consumers. Unfortunately, these funds have not been redirected to real sector that can create employment opportunities and make poor able-bodied to earn sustainable income rather than pivoting on dole-outs from the state.
Consumer price index inflation came down to 10.8 per cent during this fiscal year from 13.7 per cent a year ago, claimed the government. The inflation target for next fiscal year was set at 9.5 per cent. Stable inflation, which is still higher, allowed the central bank keep benchmark interest rate static at 12 per cent.
Facing a tough task of mobilizing tax money without authority to touch sacred tax evaders, federal board of revenue (FBR) has come the other way round to expand tax network to rich and wealthy. The proposal has been floated to increase income tax on affluent class and duties on luxurious imports. It was proposed to push up import duty on all vehicles above 1800 cc by 10 per cent from current 150 per cent while such a vehicle should be taxed Rs100,000 per annum.
FBR has to raise Rs528 billion collectively in May and June to meet the tax revenue target of Rs1,952 billion for 2011/12. The target was up 25 per cent over Rs1,558 billion collected last year. According to the official data, the federal tax authority collected Rs1,424 billion in July-April.
It is a normal practice of the government to understate expenditures and overestimate revenue. Media reports are springing up of expenditures exceeding targets in different heads.
Pakistan's fiscal deficit stands at seven per cent, reports said. Next year target was smartly set to placate IMF, said economists.
Some independent economists think that Pakistan's debt is not a serious issue but low tax to GDP ratio. In a way, this argument makes sense when one looks at size of debts of some developed economies outweighing size of their economies. Pakistan's debt is equivalent to half of the country's GDP that has swelled up to $232 billion this year. If the country becomes abler to increase taxes, debt servicing that eats up 30 to 40 per cent of budget at present, will not get in the way of development expenditures, they said. But, more sensible is the situation when the country gives up its overreliance on debts-especially foreign debt making Pakistan to fork out nearly one billion dollar in interest payments alone in a year-and pivot on domestic resources especially tax avenues to trim down fiscal deficit. Along with this, reduction of non-development expenses helps in lessening the level of loans. Funds directed to productive sources can bring in economic betterment.
"Lower foreign investment inflows and IMF debt repayments could exacerbate balance of payments difficulties," said the World Bank report titled global economic prospects-managing growth in a volatile world, referring to Pakistan.
"There is an urgent need for policy action in several areas, including: rebuilding policy buffers, in particular through credible fiscal consolidation over the medium-term while protecting the most vulnerable; creating a stable and predictable policy environment for the private sector; and finding sustainable long-term solutions to ease electricity shortages and infrastructure gaps," added the report.