Report for First Quarter of Fiscal Year 2015 (Q-1FY15) released by State Bank of Pakistan (SBP) reveals that the government made external repayments of Rs13.5 billion. In 2014, the external debt/liabilities touched the mark of $65.6 billion. On domestic front, non-bank borrowings increased sharply from Rs116.1 billion in Q1-FY14, to Rs210.4 billion in Q1-FY15.
It is undisputed that external debt servicing remains the main concern in the wake of unprecedented rise in the volume of foreign loans since 2008 — the major chunk comes from the International Monetary Fund (IMF). The country paid $874 million in debt servicing to the IMF during the first half of FY 2015. The real challenge on this front will come in the year of maturity of 10-year Eurobonds issued in FY 2006 ($500 million) and FY 2007 ($750 million), due in FY 2016 and FY 2017. Repayment of rescheduled Paris Club debt under Official Development Assistance will also start from FY 2017, while servicing the Extended Fund Facility programme with the IMF will begin in FY 2018 — the five-year Eurobond issued in April 2014 of $1 billion would mature in FY 2019.
It is, thus, obvious that debt obligations starting from FY 2016 would create extraordinary pressure on the country’s foreign exchange reserves. Though the foreign exchange reserve rose to US$11.207 billion at the end of February 2015, increasing debt obligations pose vulnerabilities vis-à-vis its sustainability.
Another alarming feature is current account deficit of US$2.37 billion during the first seven months of FY 2015. Trade deficit also widened to $14.1 billion from July 2014 to February 2015. Exports contracted 4.9 per cent in July-February period of current fiscal year, totalling $16.01 billion as per figures released by the Pakistan Bureau of Statistics (PBS) on March 10, 2015. The receipts were $828 million less than the exports made in the same period of previous year. Contrary to the decline in exports, the import bill rose to $30.6 billion, an increase of $1.2 billion or 4 per cent over imports in the first eight months of the previous fiscal year. This caused a trade deficit of $14.6 billion or 15.94 per cent in the first eight months.
According to SBP, public debt “reached Rs16.6 trillion as of end-September 2014, showing an increase of Rs246.7 billion during Q1-FY15, which was almost a quarter of the rise recorded in Q1-FY14.” Following the net addition of Rs189.4 billion, the outstanding stock of domestic debt reached Rs 11.1 trillion by end-September 2014. Fiscal deficit increased slightly to 1.2 per cent of GDP, from 1.1 per cent in the same period last year. The report says that “this increase came primarily from a rise in interest payments, reflecting a higher volume of PIBs in the government’s resource mobilisation during the last three quarters.”
It is further revealed that provinces, requiring to show a combined surplus of Rs289 billion during FY15, has actually posted Q1-FY15 only Rs57.7 billion, i.e., less than half the surplus in Q1-FY14.
Managing high fiscal deficit (root cause of many economic ills) coupled with massive debt burden is the toughest challenge faced by our economic managers. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the ten years, Pakistan’s fiscal policy remained under immense pressure owing to perpetual failure of Federal Board of Revenue (FBR) to meet the assigned targets, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies.
For the fiscal year 2013-14, as per original target, the FBR was required to collect Rs2475 billion [the target was first reduced to Rs2345 billion and then to Rs2275 billion]. The FBR finally collected Rs2254.5. The federal government’s total revenues (both tax and non-tax) in budget 2013-14 were estimated at Rs3420 billion, out of which the share of provinces was Rs1502 billion — at the end they got only Rs1264 billion. The federal expenditure under debt servicing estimated at Rs1154 billion, defence affairs & services was Rs627 billion and running of civil government was Rs275 billion. After charging these four items, there was revenue deficit of Rs1065.5 billion — meaning by, more borrowings! In fiscal year 2013-14 due to massive revenue shortfall of Rs208.5 billion on the part of FBR, all the four provinces could not get the promised funds from 7thNFC Award.
In fiscal year 2013-14, total debt and liabilities increased to Rs18.24 trillion from Rs16.33 trillion in 2013-13. Since the government borrowed heavily from external and internal resources to finance the fiscal deficit, huge funds went to debt servicing. It increased to Rs1.792 trillion from Rs1.538 trillion within 12 months’ period. Pakistan’s obligations on external debt are rising enormously. In the coming years, the government will have to borrow more, just to repay past loans. The domestic debt will also increase as the government has failed to broaden the tax base and reduce expenditure.
According to IMF, Pakistan requires nearly US$10.8 billion during the current fiscal year — the bulk of this will go towards returning foreign loans. The government requires US$3.1 billion alone to meet the current account deficit. It needs further US$ 5.4 billion to retire medium and long-term loans including US$1.3 billion to the IMF. Another US$ 3.6 billion are required to pay back loans acquired from other creditors like the World Bank and Asian Development Bank (ADB).
Faced with this challenge, there is no desire to foster fiscal discipline. No strategy is devised to mitigate risks of falling foreign reserves and increasing debt burden. Resultantly borrowings from banks are increasing to pay off liabilities of the ailing Public Sector Enterprises (PSEs). According to SBP, “this has inflicted economy heavily and resulted in billions of rupees increase in the stock of total debt and liabilities (TDL).”
The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure the rule of law, and stop reckless borrowing and ruthless spending.
Shahid Javed Burki in “Provincial Rights and Responsibilities” [Journal of Economics, September 2010] opines that “about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy.” We are not taxing these rich 15 million.
Our tax potential at federal level alone is about Rs7 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates will be Rs1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs400,000 to Rs1,000,000 is added, the gross figure would not be less than Rs4500 billion — the FBR collected only Rs850 billion in 2013-2014.
Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50 per cent of actual potential. The FBR in 2013-14 collected Rs1002 billion as sales tax, Rs139 billion as federal excise and Rs241billion as customs duties. Collection under these heads should have been at least Rs2500 billion. Target of Rs7 trillion is achievable provided the mighty segments are taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.
Collecting Rs7 trillion at federal level can make Pakistan a self-reliant economy. This is the only way to get rid of ‘debt prison’. Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.