PUBLIC DEBT SPIRALLING OUT OF CONTROL

TARIQ AHMED SAEEDI 
(feedback@pgeconomist.com)
Sep 13 - 26, 20
10

Pakistan's fragile economy is facing the difficulty of managing fiscal risk that is being intensified because of the widening gap in revenue and expenditures and with the government resorting to the central bank to overcome liquidity crunch. A failure in making effective policy response to the fiscal risk leads to high interest rate and low economic growth. The current discount rate of 13 per cent is unsupportive to growth while fiscal measures are in need of revisiting by the government.

The rising fiscal deficit due to insufficient revenue and burdensome impact of flood that has ravaged a larger part of the country has also turned the government to tap inflation-triggered acquisition of debts from State bank of Pakistan.

First two months of the current fiscal year saw an enormous rise in the government borrowings from the central bank since acquiring loans from commercial bank remained a costly option for the government during the period. That lending rate of commercial bank is higher prompts government to look for other sources of liquidity main being central bank, which charges low interest rate on loans. The corollary of borrowing from central bank is stubborn inflation.

As Pakistan's economy wages battles on many fronts, the jump in government's borrowings from the central bank in two months of the current financial year to over 155 billion rupees was not accidental, indicting a surge of 416 per cent. It is notable that debt level in the same period last year had hovered below 30 billion rupees. This time round government expenditures scaled on the back of upward non-development expenditures in the backdrop of low productivity. Increasing allocations to maintain law and order and extension of financial stimulus to state-run companies weighed on the fiscal space. The government has lost control over its spending spree. Austerity measures could not enter in to the materialisation step as extravaganza by the officials continues unabatedly. Political interferences in economic decision-making are drag on national exchequers. The government is still subsidising billon of rupees to keep its political stakes intact in lose-making state-run entities. Presidential house issued decree-like recommendation to tax collector recently to levy one-time property tax on different categories of residential houses. Critics said the plan would not be successful in plugging the revenue-expenditure gap to a significant extent as with a logic they said property tax would earn government only eight billion rupees, an amount insufficient to make up for a huge shortfall. Dr Hafeez Pasha head of economic advisory council said revenue generation plan would prove itself ineffective until the government withdraws financial supports to lose-making companies. The government gives 200 billion rupees financial aids to feed such white elephants. Advocates of revolutionary changes in tax administration system believe that 500 billion rupees are siphoned off from the channel of tax system and rectification of deficiencies in the system will certainly narrow down the fiscal deficit.

State bank of Pakistan, the apex regulator of banks and development financial institutions in the country, is yet to be freed itself from the influence of the government. Partial autonomy of the central bank is one of the reservations what may have prompted International Monetary Fund to delay disbursement of remaining 2.6 billion dollar tranches of 11.3 billion dollar Stand-By Arrangement Pakistan agreed to avert balance of payment crisis and most importantly to prevent defaults on sovereign debts two years ago. In a belated performance review this month, the Washington-based lender attributed non-realisation of outstanding tranches to among others nonautonomous status of State bank of Pakistan. This hold-up will have an implication on foreign reserve position of the country besides putting recovery at risk. IMF has offered 450 million dollar emergency flood assistance to Pakistan. This loan is in addition to 11.3 billion dollar offered as economic assistance.

The government of Pakistan has asked other countries to help the country meet budgetary chasm creviced due to the country's frontline role in the war on terror and the losses the country is enduring because of this. Tokyo conference was a highlighted event that saw many nations pledging financial supports to Pakistan. Slow materialisation of commitments exacerbated the macroeconomic imbalances of the country's economy that has lowest tax to GDP ratio.

Monsoon-triggered floods cast shadow over the economic recovery process with the country needing heavy funds for rehabilitations and reconstructions. Federal government has grinded axe to slash development expenditures to meet costs of developments of infrastructure devastated by the floods. Any such reduction means fewer developments as a whole.

Limiting public debts was also one of the conditions of loan granted by the IMF, which also has warned in its global report that public debt remains a major hurdle in the way of fiscal discipline for most of the World economies. "Public debt levels among advanced economies have reached levels not seen before in the absence of major war," said director of the IMF's fiscal affairs department. It is worthwhile to note in the report government debts in advanced economies of G20 had reached almost equal to their gross development products, 78 to 97 per cent in 2009. The lender cautioned the level is projected to surpass 115 per cent of GDP by 2015. In the same breadth, it said "limits to public debt are not etched in stone or a [definite] prediction that default is inevitable in cases of limited fiscal space... But, [in such cases] policy cannot proceed on a 'business as usual'". Obviously, IMF got a push to turn up the analysis from edgy economic progress of most of the developed nations, which are extremely depending on national exchequers' wealth or public debt to offset financial tremors triggered by the global crisis. It calls for 'change to control large primary deficits' in order to keep public debts at sustainable path.