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Tightening debt shackles

The rising burden of internal and external debts has serious ramifications for the economy

Tightening debt shackles

Today is the last day of 2017 — the entry into 2018 is with increased debt shackles, courtesy unprecedented borrowing spree since 2013 by the government of Muslim League-Nawaz. In the current fiscal year, Pakistan is expected to achieve a growth rate of 5.6 per cent as compared to 5.3 per cent in 2016-17, but is facing huge fiscal, trade and current account deficits.

The trade deficit widened to US$15 billion in the first five months of the current fiscal year rendering the annual target of $25.7 billion irrelevant. Admittedly, the expected figure of current account deficit for 2017-18 would be around US$ 12 billion (independent economists say it will be US$ 16 billion). The fiscal deficit has already risen to 5.4 per cent GDP — many are of the view that despite 20 per cent growth in revenues, it will be around Rs2.2 trillion for the current fiscal year — last year it was Rs1.86 trillion.

The present policy of imposing irrational taxes, e.g. taxing even that portion of citizens’ income that they spend on educational and medical needs, can never produce any positive results.

Deficits are showing that health of the economy is not good at all and growth rate alone cannot be celebrated as “great achievement”. The real issue that has yet not been realised by the government is the rising burden of internal and external debts that has serious ramifications for the economy both in the short term and long term perspectives. Since 2013, the reckless borrowing and ruthless spending have been going on unabated. Fresh loans of $5.2 billion were obtained in the five months of the current fiscal year — more than two-thirds of the annual estimate.

Islamabad-based Policy Research Institute of Market Economy (PRIME) in its latest report on four-year economic performance of the present government noted that it has failed to fulfill its promises made in election manifesto — achieved just six of its 89 announced goals.

It needs to be recognised that in the wake of weakening Pak rupee, the debt burden and debt servicing have also risen. Our external debt and liabilities by September 30, 2017 stood at US$85 billion — an increase of 12.3 per cent, as reported by the State Bank of Pakistan (SBP). In September 2016, the country’s total external debt and liabilities were $75.8 billion. The figures do not include US$2.5 billion obtained in November 2017 by floating two sovereign bonds. The release of SBP external debt bulletin coincided with the depreciation of the Pakistani rupee against the US dollar. The local currency has already shed its value by about 7 per cent during the last three months.

The figures released by SBP regarding external debt and liability figures till the period of September 2017 were calculated when the value of rupee to a dollar was Rs105.40. After shedding of value by rupee, additional amount of Rs436 billion accrued to service the same amount of debt. At Rs105.40 to a dollar, external debt and liabilities were equal to Rs8.964 trillion that, due to depreciation, have increased to Rs9.4 trillion. The correction in value of rupee has long been predicted after weakening position of the external sector. Independent economists have been warning the government about the implications of exchange rate adjustments but Ishaq Dar and his team, as usual, remained in a mood of denial.

The government must remove high taxes, especially on petroleum products that badly affect all sections of the society and make exportable goods uncompetitive.

During the first quarter of the current fiscal year, US$2.1 billion were spent on repayment of external debt and interest. The cost of public external debt servicing stood at US$1.64 billion. The principal loans repayment by the public sector stood at US$1.34 billion in just three months. The cost of interest payments increased to U$300 million in the first quarter.

The position of gross domestic debt is equally appalling. According to SBP, it stood at Rs25.8 trillion as on September 30, 2017 — it was Rs22.5 trillion as on June 30, 2017. On the other hand, total revenues vis-à-vis total expenses for the first three months of fiscal year 2017-18 show fiscal deficit of nearly 1.5 per cent. This gap will increase further when the final figures for six months of the current fiscal year would be made available. The consequences are obvious: more borrowing in the months to come and more taxes in the next budget. More taxes will retard growth and affect fixed income earners along with the poor. Further debts mean more squeezing of fiscal space — enormous debt-servicing leading to deadly debt trap that is to borrow just to pay interest of old debts. Debts are required to meet current expenditure — to bridge budget deficit. Those meant for development and creating income-yielding assets are not worrisome.

The latest figures of total public debt, available at the website of State Bank of Pakistan (SBP), present quite an alarming situation. There is another important document titled, Revision Study on External Debt Statistics, released by State Bank that narrates the history of our economic subjugation that started in 1960s when the rulers began taking large intakes of foreign loans. With every loan came a host of conditions. These conditions, ostensibly aimed at reforms, in fact meant to subjugate us, economically and politically.

It is an admitted fact that our economic managers, during the military and civilian rules alike, have been borrowing recklessly. Borrowing per se is not objectionable. But funds have been abused — wasted on huge perks and perquisites to the privileged classes and not for economic uplift of the country. Today’s Pakistan represents a state where a trio of militro-judicial-civil complex, businessmen-turned-politicians and absentee landlords sitting in houses of parliament, is very affluent, but the government is poor, needing loans even to pay its employees’ salaries and other day to day expenses. This state of affairs is the direct outcome of the policies of successive governments, giving a free hand to tax evaders and plunderers of national wealth.

The most painful aspect of debt-enslavement is converting Pakistan into a subservient, toothless nuclear state. The transition of Pakistan from ‘Kingdom of Heroin’ in Zia’s era to “debt-enslaved state” under civilian rules, confirms how the country was pushed towards a state of helplessness, needing loans to pay interest on loans. The policies of appeasement towards the corrupt, laws protecting dirty money and frequent tax amnesty schemes have eroded the fiscal base, besides weaning away writ of the state.

The issue is how to break this debt-prison. The key to debt retirement is export-driven growth and collection of taxes fairly and justly, but firmly, without any favour or fear. The real tax potential of undeclared income/wealth in Pakistan is in trillions.

Indonesia, through a successful scheme, has recently mopped undeclared assets of around $300 billion! Pakistan can collect tax revenue of Rs10 trillion if there is political will and Federal Board of Revenue (FBR) is converted into an independent, efficient and professional agency on the pattern of Canadian Revenue Agency. The collection of taxes of Rs8 trillion will not only eliminate fiscal deficit but provide ample funds for infrastructure projects, human resource development, health, education, transport and housing.

With accelerated growth in exports and industralisation, Pakistan can retire external and internal debts. The path to prosperity and self-reliance lies in convincing the masses that taxes collected would be spent for their well-being and not on unprecedented benefits for the elites.

The government must earmark revenues for specific purposes and place the same in funds created for debt retirement, creation of employment zones and provisions for social services like education, health, transport, housing etc. This will inspire the people to contribute towards the national exchequer. This is the only way that revenues can be generated through voluntary compliance.

The present policy of imposing irrational taxes, e.g. taxing even that portion of citizens’ income that they spend on educational and medical needs, can never produce any positive results. These are creating more inequalities in the society leading to social unrest and lawlessness. The government will have to improve law and order situation, reduce high charges of power and gas to attract foreign investors and give incentives to local businessmen to enter into joint ventures with them.

If the government is really interested to improve the situation it must remove high taxes, especially on petroleum products, that badly affect all sections of the society and make exportable goods uncompetitive.

Dr Ikramul Haq

One comment

  • Why to waste your time energy on writing such essay when you are unable to understand the goal of the rulers.They don’t want to change the status quo as it is in their favor.If country is becoming enslaved in debt,what are they going to loose.They have their families,properties,businesses,houses and offices abroad.Here they are to rule and plunder more and more.They are not to suffer from inflation so why they should worry.The system is deceiving as neither National assembly represents the majority of the voters,nor it is capable to implement any thing, even their own so called resolutions.Members get all perks and privileges and don’t attend the assembly, because they understand the system more than you.These are futile efforts to make them understand something against their benefit,as they already understand it and all their power is for status quo which is in their favor.

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