PAKISTAN LANDS IN WORST DEBT TRAP
Jan 11 - 17, 2010
As was feared, Pakistan has landed in a worst debt trap. The total debt burden, both external and domestic, has mounted to over Rs8 trillion and the country would require about Rs750 billion for debt servicing this year more than 50 percent of the total revenues expected during 2010-11.
Extremely worried, a senior official of the Ministry of Finance told this correspondent in May last year that the fast pace with which the burden of foreign debts was rising along with the amount of debt servicing, it is feared that Pakistan would land in the worst debt trap. What would be left after debt servicing would hardly cover the defense and administrative expenses, leaving nothing for developments.
Alarmingly the country's external debts had increased by $2.6 billion during the seven year period (2000-07), but in the subsequent 27 months alone, the external debts swelled by a massive $15 billion. Analysis of the data shows that over the last 60 years, Pakistan's public debt increased to Rs4.8 trillion, but since July 1, 2007 to September 30, 2009, the public debt swelled by an unbelievable 71 percent to a whopping Rs 8.3 trillion. This means within just two years and a quarter, the debt surged by Rs3.5 trillion.
The increased debt will expose the country to too much high levels of debt servicing in the next fiscal year (2010-11). This increase of 12% will spark servicing funding to increase to Rs750 billion from the existing Rs679 billion.
On the same trajectory, the debt servicing cost will touch the staggering figure of Rs1,000 billion by 2014-15, which also happens to be the National Finance Commission (NFC) period.
A senior official of the Ministry of Finance conceded that with such high levels of public debt, and low governance standards, development could well remain a pipedream as even a minor variant could plunge the system into a full bloomed financial crisis. Requesting anonymity, he said to that the incumbent regime had no "real option but to literally wage a crusade for revenue generation, rationalize expenditures, and decrease the budget deficit.
Pakistan is at the forefront of world's war against terrorism and paying a heavy toll for global peace and therefore must ask its Friends of Democratic Pakistan (FODP), which have so far not come up to the expectations of Pakistan with regard to materializing their pledged help amounting to $5.28 billion, to either write off their debts or at least give a debt servicing moratorium.
The available financial data show that $38.073 billion of Pakistan's multilateral and bilateral debt has come from countries which are members of the FODP.
Things are expected to get even tougher for the federal government for debt servicing and arranging huge capital for increasing defense and security related expenditures at a time when the centre has also given away 10 percent share of its from the divisible pool to the provinces.
According to one conservative estimate, the defense and security related expenditures will increase 37 percent in next fiscal year up to Rs615 billion from the existing Rs450 billion while these expenditures are likely to surge by over Rs800 billion up to 2014-15.
The federal government's budget deficit is likely to increase in next fiscal to 5.5 percent. To meet these challenges, the centre and provinces would need to work closely for greater revenue generation as in the post-NFC scenario, onus of provinces has increased manifold to increase revenue generation. The situation is extremely serious and the country badly needs a bailout package from friends of Pakistan.
In the absence of debt write-offs or a debt servicing freeze it seems impossible to avoid the worst. Nevertheless, it would be necessary for the government to reduce the public and private overspending and excessive demand through judicious use of its fiscal policy, in order to bring about an improvement in the fiscal and current account deficit on a sustainable basis.
The excessive demand is inter alia the outcome of previous government's policy to accelerate GDP growth by boosting consumer spending. The past regime's policy had widened both the fiscal and the current account deficit causing a setback to macroeconomic stability.
While bringing down the non-development expenditures to a sustainable level, it would also be imperative to increase revenue collection in order to provide sufficient fiscal space to the government. Bringing untaxed income into the tax net should, therefore, not be delayed and the process may be started from the next budget, in order to mop up excessive demand and reduce government's dependence on internal and external debts.