When does debt become a nightmare?
Government extravagant expenditures, fiscal deficits, reserves, balance (or rather imbalance) of payments, debt repayments and government optimism they are tied together in perfect rhythm, at least theoretically. They go hand in hand, and one cannot exist without the other. Government spokesmen and talk show hosts will occasionally visit different socio political aspects, run endless shows on not so trivial issues, yet very little is said or raised regarding the seriously vulnerable economy of Pakistan. The government, like its predecessors, instead builds a smoke screen around short term economic gimmicks such as the current rate of dollar, buildup of foreign reserves by deferring foreign payments, stock market ascent, while discretely evading the key question of mounting domestic and foreign debt of Pakistan.
The most common argument most book driven economist throw is the famous Debt to GDB ratio, which is currently around 63 per cent, and is still within limits compared to economies like Japan, EU and the US. That, however, is like comparing apples to oranges, and amounts to a misleading comparison by many standards.
Struggling economies cannot benchmark themselves with the likes of global giants like the US, EU, Japan and argue that their GDP to debt ratios are within limits. Many political leaders can claim that the debt levels of Japan, US and some EU members are around 100 per cent at times of their GDP, a measure often compared when Pakistan’s debt is discussed, which stands at less 65 per cent of its GDP. Firstly, developed economies spend large proportion on public services which they heavily subsidise, for instance education, healthcare, insurance and many more. Strong focus on public accountability is the key trend in developed countries and hence people have trust in the tax system as well. So a system where people feel confident paying taxes, and expect subsidised services in return, is not one Pakistan can look to as a mirror image.
The right question
Pakistan faces an enormous challenge with the pace of swelling debt levels. These questions have been avoided by the government at different forums. How big is our debt? How did we manage to accumulate so much debt and yet still remain a struggling third world country, with countless socio economic problems? Why did our economic managers not warn the masses that debt has swelled to unmanageable proportions? How sustainable is our current debt? And how vulnerable are we considering our proportion and size?
Struggling economies cannot benchmark themselves with the likes of global giants like the US, EU, Japan and argue that their GDP to debt ratios are within limits.
Debt: origins and a bitter past
Interestingly, economic managers are boosting recently crossed $10 billion reserve mark, unprecedented gains of Pak Rupee against dollar, and preferential treatment of exports, but little is being said about the swelling debt and its repercussions for the economy. If the US congress and global leaders are perturbed about the US debt crisis and dollar shedding its value, it is not possible that an economy as vulnerable as ours, infested with debt may not face similar perils.
|
2009 |
2010 |
2011 |
2012 |
2013 |
2014(P) |
||||||||
| Domestic Debt in Rs billion | 3,852 | 4,651 | 6,016 | 7,637 | 9,517 | 10,158 | |||||||
| Foreign Debt in Rs billion | 3,776 | 4,260 | 4,685 | 5,030 | 4,849 | 5,176 | |||||||
| Total Debt in Rs billion | 7,629 | 8,911 | 10,700 | 12,667 | 14,366 | 15,334 | |||||||
| Real Growth of Public Debt | 4.6 per cent | 5.5 per cent | 0.5 per cent | 12.4 per cent | 5.5 per cent | ||||||||
| Real Growth of Revenue | 2.3 per cent | 1.4 per cent | -9 per cent | 8 per cent | 8 per cent | ||||||||
The above questions have answers hidden in our bitter past. The answer to our very first question, how big is our debt really, is shown in the above table. According to ministry sources, it may cross 15,300 mark by year end. It is important to sum up the above in layman’s language.
· The debt has been increasing for the last two decades at an alarming rate. It has doubled in five years.
· The revenue stream which is meant to offset the debt has not been able to cope with the debt increase. So we are borrowing more than we can pay and this gap is widening yearly without any course. Implication: we will face far more serious issues than the US government, which may shake the entire economic paradigm and in the very near future.
· As the government has exhausted the current domestic borrowing ceiling, it has started moving to the extremely expensive, overly ambitious option of borrowing from foreign sources.
· Last PPP government did not record debt the government owed to IPPs, or government debt in the circular debt of the oil companies, as debt. It parked under another head which meant that the actual debt position was not apparent in the books. According to some sources, the present government has started parking the outstanding from IPPs which it owes for power generation, under another heading.
· Even if the government has massive problems at hand, it cannot ignore or not share the plight of the debt situation. The government has a moral duty to inform the people, and parliament, as to why the debt has risen to such unmanageable proportions? Why is it borrowing? Where does it plan to spend and how it plans to return the loan?
· This amount of Rs15,000 billion is eventually going to be returned by the people of Pakistan and they have every right to know where was this money spent in the first place and how is it going to be returned now?
Deliberate or mistake?
Tax is the biggest source of revenue for any government. If taxes fall and debt keeps mounting, there is a mismatch which means you are borrowing to pay previous debts. Low tax collection pushes even some people who did pay taxes previously to stop, since they lose confidence in the government. This lack of confidence also stems from questioning how the money collected is spent. Government expenditure mainly constitutes debt service, interest payments, and defense, which account for nearly 60 per cent of the revenue collected. That hardly leaves any for the public services like healthcare, education, police, and judiciary and so on. The leftover is mainly consumed by government expenditure which includes government running, mismanaged departments, and paying for the bureaucracy.
It is common word that government expenditure is unjustified when compared with Pakistan’s meager resources and plight of the common people. The “extravaganza” as some analysts call the government expenditure has been financed from borrowing, which is not only unnecessary but also one of the main causes for the debt to swell to current levels. Debt hence forth is being taken to fill its deficits, which government conveniently does not want to fill by running an austerity drive or reviewing its spending priorities.
Tax is the biggest source of revenue for any government. If taxes fall and debt keeps mounting, there is a mismatch which means you are borrowing to pay previous debts.
The debt is mainly categorised into domestics and external. Domestic debt is the easiest to increase and has been reaching exhaustion levels lately as subsequent governments have reverted to it inadvertently for covering up their mismanaged deficits, unnecessary government expenditures and many misadventures. According to political analysts, whether it was PPP, PMLN or even others the domestic debt has been “over borrowed” and at times figures have been “distorted”. Domestic loans have been taken from commercial banks and state bank on commercial rates, which has been “economically disastrous”. Government of Punjab under PML N has been borrowing on commercial rates amidst its development projects like Laptop scheme, Sasti Roti, Youth festival, Metro bus service, Danish schools. These projects have been under severe criticism for one reason or the other.
Is it really such a problem?
So how does debt become a nightmare? As it grows unchecked, at some point it will explode to unimaginable proportions, something which the US economy is currently facing and its repercussions indirectly the entire global economies might suffer. If you do simple math the debt is 15,000 billion and population comes out to be 200 million or 0.2 billion people in Pakistan who owe this debt. That means newborn every child will be in debt running into millions of rupees.
Only last year the US Congress refused to extend the debt ceiling to the current administration, and as a result the US government came to a halt. Stock markets came crushing down, US dollar lost is glitter; in short it was doomsday scenario for any economist, all because of unchecked and out of control debt scenario. World leaders are struggling to save the US economy from falling flat due to its debt issue, but the million dollar question is will someone care about a small country like Pakistan if we faced with the same dilemma? Can we afford to keep our public ignorant of the massive debt which our governments have accumulated? No one seems to be asking and no one seems pushed.