Debt Reduction and Management Committee

Building the forex reserves Debt Reduction and Management Committee Suggested framework for income tax law

40% of the total aid received by Pakistan had gone back to the western banks in the form of personal deposit accounts of both politicians and bureaucrats

From Shamim Ahmed Rizvi,
 Islamabad
June 04 - 10, 2001

A lively debate ensued at the one day conference arranged by the Ministry of Finance to consider the report of the Debt Reduction and Management Committee (DRMC) with a view to get feed back from various sections of society including political leaders, bureaucrats both retired and serving, economists, academicians and journalists. The first conference was held in Karachi and the second one in Islamabad on May 28, 2001.

The Debt Reduction Committee headed by Dr. Pervez Hassan, a Pakistani economic expert who retired from the World Bank as Vice President was appointed by the present Government last year to examine in detail the critical issue of massive foreign, and domestic debts and suggest measures to overcome the financial crisis which had practically crippled the national economy. The Committee in its report has proposed both short term (four years) and long term (10 years) debt reduction and management strategy.

The conference in Islamabad was opened by the Finance Minister Shaukat Aziz, flanked by Secretary General Finance Mr. Moin Afzal, his advisor Dr. Ashfaque Hassan Khan and Dr. Pervez Hassan. Prominent among those who participated in the discussion included Mr. Sartaj Aziz, Former Finance Minister, Mr. Ilahi Bukhsh Soomro, Speaker of the defunct National Assembly, Mr. Gohar Ayub, Former Foreign Minister, Mr. Wasim Sajjad, Chairman of now defunct Senate, Mr.Fateh M. Chaudhri, Member, Debt Reduction & Management Committee, Mr. Fazlullah Qureshi, Member, NEPRA, Dr. A.R.Kamal, Director, Pakistan Institute of Development Economics(PIDE), Prof. Nawab Haider Naqvi, Mr. Saqib Sherani, Chief, ABN Amro Bank, Mr. Saeed Ahmad Qureshi, Former Secretary General Finance, Mr. Qazi M.Alimullah, Former Chairman, Planning Commission, Mr. Muzaffar Mahmood Qureshi, Former Federal Secretary, Dr. Muhammad Zubair Khan, Former Minister of Commerce, Mr. Shakir Hasan, President, Islamabad Citizen Committee. Interesting situation arose when politicians belonging to former ruling elite and former bureaucrats mainly looking after the economic affairs of the country started blaming each other for the massive debt burden of over Rs. 4000 billion which the nation carries today. The DRMC described it as an accumulated effect of faulty economics imprudent and unchecked use of borrowed money and bad governance of successive governments in Pakistan specially during the last two decades for the grave situation which is now threatening the economic future of the country.

A participant remarked that he was neither a bureaucrat nor a politician who are now blaming each other for the mess they have jointly created. He said he represented the 140 million unfortunate people of this country who have suffered at the hands of both of them and now demand an account what we received from where and on what projects it was spent. He referred to a report prepared by US research organization and presented at a seminar at the National Strategic Studies in Islamabad about 2 years backing which it was alleged that almost 40% of the total aid received by Pakistan had gone back to the western banks in the form of personal deposit accounts of both politicians and bureaucrats of this country.

There was almost consensus at the conference that Pakistan today faces a gravest financial crisis which have been in the making for decades and which has, by now, assumed alarming proportion threatening the economic future of the country. The broad thrust of DRMC report was generally approved but there was a general feeling that the targets fixed for the 4 year short term were over optimistic and could not possibly be achieved during this short period. The participants were generally of the views that the time frame will have to be extended to 7-8 years to achieve the target fixed for 4 years.

One should be grateful to the present government which took serious notice of the situation immediately after coming into power. Unlike the previous practice of hiding facts from public view and taking adhoc measures — mainly resorting ito short term borrowing from commercial market at exorbitant rate of interest to pay off the due installments of low-interest loan and avoid default — this government took a bold decision to appoint a committee of experts to examine the issue from all angles and suggest measures to achieve a permanent solution of this grave national crisis.

It is for the first time that the nation has come to know, through official sources, that faulty economic policies and imprudent use of borrowed money characterized with corruption and inefficiency, has landed us in a massive debt burden of over Rs. 4000 billion (2300 billion in foreign and over 1600 billion domestic loan) (Committee reports this figure Rs.3570 billion on December 2000 but at present conversion rate it is over 4000 billion). We need over Rs. 300 billion for debt servicing during the current (2000/2001) financial year, as against total revenues of 307 billion collected during the first 10 months (July 2000 to April 2001). The external debt problem has greater urgency because of concentration of large external debt service payment amounting to about US$ 21 billion over July 2000 to June 2004. While our total foreign exchange earnings (export and remittances by overseas Pakistanis) can hardly meet our import bill leaving nothing with us. Alarming is, perhaps, no word to describe the gravity of the situation.

The Debt Reduction and Management Committee, as per its term of reference, has come out with a debt burden reduction strategy — a short term plan of action covering four years from July 2000 to June 2001 and a long term plan terminating in 2010. The Committee has rightly concluded that since the debt problem has risen because of poor economic decision, postponed reforms and poor governance over a sustained period, there is no easy remedy for debt burden reduction. The satisfactory resolution will take both time and aggressive policy decision involving painful crises. The Committee stressed the need of economic revival, sizeable increase in revenue generation and exports as a priority No.1 of this programme. According to the 4 years strategy, which has been developed over some basic assumptions, the debt scenario will completely change by the year 2004 and the debt burden will come down to internationally recognized sustainable level of 300 per cent of government revenues from present 625 by June 2004. The basic assumptions on which this scenario has been built appear over optimistic. As per table 18 on page 61 of the report by the year 2004 Pakistan will have a surplus revenue budget besides having a foreign reserve of about $ 5 billion and meeting the debt liabilities of about 20 billion US dollars. This sounds too good to be believed.

This scenario assume revenue collection to increase to Rs. 704 billion (about 75% increase on the present level) dramatic increase in exports to exceed $12 billions. GDP growth rate to increase to 5.5 per cent, fiscal deficit to come down to 3 per cent, cut in defence expenditure, complete elimination of borrowing for non development expenditure, increase in national savings to meet about 90% of domestic investment requirement and raising $ 3 billion by Privatization Commission through sale of state owned units to foreigners. On the external front, it is assumed, Pakistan will receive concessional loans of over 6 billion US dollar during this period by donor agencies to help Pakistan to tide over this difficult period.

That these assumptions are unfeasible is also testified from the fact that even a fraction of improvement assumed for four year plan (2000-2004) has not been achieved during the first year (2000-2001) as is indicated from the following:

1) Revenue generation for financial 2000 - 2001 was estimated at Rs. 430 billion it was revised downwarded to Rs. 417 billion. During the first 10 months the actual collection has been Rs. 307 billions. It would hardly touch the figure of 400 billion by June 30 showing an increase of about 14% over last year. This was the year of tax surveys and documentation of economy and all concerned were expecting an increase of 33% or Rs. 100 billion revenues.

2) Export target were fixed at $10 billion. During the first 10 months exports have reached up to about 7.3 billion and the year may end with about 8.5 billion with trade deficit of over 1.75 billion as there has been no reduction in imports as assumed in the report.

3) GDP growth rate has come down to less than 3 per cent from 4% last year and 4.5 per cent estimated for the current year and assumed at 5.5% per cent in DRS scenario. There is no sign of economic revival so far there has been a sharp decline in domestic investment which has come down to 2.8 per cent in 2000-2001 from about 8% last year.

4) The-DRS model stipulate conversion of revenue deficit into a surplus by the year 2003 - 2004 which will continue to rise eventually bringing an end to borrowing for current consumption. It also stipulates to bring down the fiscal deficit 1.8% from current over 9 per cent. The reality on the ground is that during the current year budget is likely to go upto 5.5 per cent as against 4.5% estimated in this budget. There have been factors beyond the control of economic managers as drought and consequent negative growth in the agriculture sector. But that is the ground reality and there has been no provision for such eventualities in DRS.

5) Similarly there is skepticism about Privatization Commission capacity to raise $3 billion by sale of some units to foreigner, increase in national savings specially where the rates of profits have been cut on NSS, cut in defence budget (about 25 billion of Army pension has been transferred to civilian account to show that Army budget is constant) and so on.

6) International donor community seems to be satisfied with the implementation of ongoing reforms in different sectors. Despite that, however the concessional loans will be available on the improved performance in domestic economic scene as projected in DRMC. If that is not coming through we may face difficulty on this front as well.

7) Surprisingly however, the DR&M Committee has not taken full cognizance of two important aspects of economy; (1) Remittances through official channel. According to the Finance Minister recent statement about $ 6 billion were being remitted by overseas Pakistanis annually out of which only l billion were coming through official channels. State Bank was buying about $1.5 billion from the kerb market while the rest was being utilized by smugglers. If we can ensure that at least 50 remittances come through official channel it can solve lot of our problem on forex front. (2) Recovery of defaulted loans (about Rs. 150 billion) and non performing loans of about 300 billions (about 33 per cent of total loan advanced). Recovery of this amount can help us in retiring our expensive domestic debts. If it can not be done under the present government, it can never be done.