ALARMING RISE IN THE DEBT BURDEN

SHAMIM RIZVI
(feedback@pgeconomist.com)

Dec 19 - 25, 2011

The federal government borrowing from scheduled banks to meet budgetary expenses phenomenally increased during the first five months (July-Nov ) of the current fiscal year (2011-12 ) as it grew 12 times against the corresponding months last year.

According to the official data released last week, the amount during this period exceeded Rs630 billion from Rs48.47 billion during July-November last year.

This aggressive borrowing by the government from the schedule banks is attributed to a policy shift in borrowing pattern from the central bank to commercial banks as the government agreed on the insistence of the State Bank of Pakistan (SBP ), which wanted its lending to the state at the minimum. According to the analysts, commercial banks were also allured by this opportunity as they were faced with the problem of surplus because of less demand from trade and industrial sectors and at the same time the SBP was injecting huge sums to keep the system liquid. In simple words, the central bank was providing funds to the scheduled banks, which were lending to the government to enable it to meet its day-to-day expenses.

On the front of external debts, the situation is equally alarming. Pakistan's total external debt presently stands at the level of $62 billion, which is likely to increase by another two billion dollars by the end of current financial year.

According to a repot, the total burden of both internal and external debts (converted at the rate Rs85 a dollar) had touched the alarming figure of Rs8.9 trillion by Dec 31, 2010 out of which the PPP led government had obtained Rs5.4 trillion during about four years of its tenure against Rs5. 5 trillion obtained by the earlier governments during the last 60 years. This shows the reckless borrowings by the incumbent government both by internal and external sources.

Public and external debts have grown during the last four years at a pace never witnessed in the country's history and reached at an unsustainable level.

Many factors have contributed to the recent surge in the debt burden. These include the persistent of large fiscal and current account deficits, sharp depreciation of exchange rate by about 35 percent and the massive losses of over Rs300 billion by the government owned enterprises mostly because of rampant corruption in these organizations under official patronage.

The economy of the country is in an extremely bad shape with growth rate lowest in the region.

Indebtedness represents one of the greatest problems facing Pakistan in recent times and presently the country is facing a mountain of debts and huge budget deficits.

Massive debt's installments and swelling budget spending hinder the abilities of creation jobs for unemployed and helping the poor leading to soaring poverty level.

There is nothing available for any development work. Even salaries are paid by borrowed money. The present economic managers have not been able to achieve the objectives of the economic stability and the economy has now no breathing space.

At this point, when the debt indicators have reached unsustainable levels, it is now clear that the debt service would be an obstacle in the normal function of economy. The government badly needs to strengthen its economic base and vital debt sustainability variables such as GDP growth, exports, and tax revenue. Strengthening these indicators would set pace for debt management with focus on retiring external debts and reducing domestic debts. If the past is an indicator, the government is not performing on its commitment made to the international monetary fund (IMF) to reduce fiscal deficit to a manageable level. A failure this time may lead Pakistan to sink deeper into an unmanageable debt trap.

On the other hand, experts including independent Pakistani economists are of the unanimous opinion that such a situation would have been avoidable had the government decided to come up with a firm resolve to eliminate rampant corruption from the government's departments specially the FBR and other law enforcing agencies and to tighten noose around dishonest businessmen, scandalous politicians, corrupt bureaucrats and all those who had deposited their illegal money in foreign banks.

According to an estimate, such corrupt Pakistanis have their deposits of about $500 billion in foreign banks, which they have amassed through loot and plunder in Pakistan. This is about six times than what Pakistan owes as external debts. There is an estimated tax evasion of over Rs1000 billion annually apart from totally unjustified tax exemptions to the tune of Rs500 billion like the tax on income from agriculture.

All this can be undone provided we have an honest government who can launch a holy war (Jihad) with a firm hand without any fear or favor.

Even 50 percent success can wipe out the entire fiscal deficit besides leaving a large surplus for the hitherto neglected development projects to end all types of shortages and bring an era of prosperity in the country.