Public debt, political gain: Govt faces tough balancing act on rising expenditures in 2017

Dawn asked how Pakistan would deal with increasing public indebtedness this year and the government responded.


By: Afshan Subohi

The federal and provincial governments are expected to throw caution to the wind in 2017 and spend liberally on development schemes.

This is to score points for performance before they return to voters in 2018.

Will this new wave of public spending translate into higher growth? It could marginally.

Will it increase inflation? Yes.

Will that lead to an interest rate increase? Yes.

Will expensive credit depress private investment? No.

The investment rate is too low, and, if there will be any movement, it will be northward.

The way cheap credit failed to excite Pakistani investors, costly credit may fail to dissuade them.

Too much government expenditure in the country certainly entails a risk of destabilising the external sector.

The financial lag means public debt is expected to increase exponentially over the current year.

Both the federal and provincial governments are expected to borrow from all possible avenues (from banks, the SBP and the market) to feed their ambition.

The country might actually be forced to knock on the IMF’s door before the close of the year since the prospect of improvement in export earnings and remittances is grim.

The pace of growth in remittances lost steam in 2016 and could further slow-down in 2017 because of a shrinkage in Middle Eastern oil economies, from where much of the inward flows originate.

To give an impression of efficient fiscal management the government may be tempted to change not only the rules of the game but also the field.

It may be inclined to extend the legal boundary of government borrowing by further amending the Fiscal Responsibility and Debt Limitation Act 2005 to avoid the danger of busting the permissible borrowing limits.

Through the Finance Act 2016 the Nawaz Sharif government has already diluted the said law and extended the statutory deadline to bring the debt to 60pc of the GDP from 2013 to 2018.

It also redefined ‘total public debt’ as the ‘debt of the government obligated to be serviced out of the consolidated funds and debt owed to the IMF’.

The new definition excludes private sector external debt and intercompany external debt from the principal abroad.

This might be justifiable but excluding external liabilities, (that include central bank deposits, SWAPS, allocation of SDR and non-resident LCY deposits with the central bank, PSEs external debt, PSEs domestic debt and commodity operations including borrowings from banks by provincial governments and PSEs), is hard to defend.

It would be unrealistic to expect a stunning performance from the FBR or drastic tax yielding changes in the tax regime in the year ahead.

The scenario is gloomier on the external front. The current global wave of protectionism could further erode the scope of exports, worsening the country’s already alarming balance of trade position.

The arduously built foreign exchange reserves will be under pressure because of debt servicing and payments for persistently rising imports.

An uptick in world oil prices or further slowdown in remittance inflow can exert pressure on foreign exchange reserves.

Even if one rules out negative surprises the trend is leading towards a bigger balance of trade deficit.

In the absence of promised inflows from donors and friendly nations, pressure on reserves will upset the balance in the currency market and exchange rates.

The return to the IMF, therefore, will be a probable outcome.

Economists, such as former finance minister, Dr Hafiz Pasha, former special secretary on finance and DG Debt office, Dr Ashfaq Hasan Khan and PPP Senator, Salim Mandwiwala, projected Pakistan’s total debt to be in the vicinity of $110bn if liabilities related to the CPEC are properly booked in the debt accounting exercise.

Recently in Lahore, Dr Khan said that the government applied a lot of creative accounting to keep the books in order and veil its fiscal mismanagement.

“It is absolutely necessary to present the reality honestly if there is a will to improve the quality of management and shuffle priorities to match economic needs,” he said in an informal chat, commenting on the behaviour of the current set of economic managers.

Supporters of the democratic government find anxiety over public debt misplaced.

They argue that if the government succeeds in using the acquired funds efficiently for capital formation, the benefits could outweigh the cost of the undertaking.

Officials of the Public Debt Management cell dismissed the perception of fiscal irresponsibility as baseless.

“The criticism is politically motivated. Do you really think the IMF can be dodged? For the last three years the economy was closely monitored by the IMF that assessed the performance of the government to be broadly satisfactory.

“They did warn of external sector risks, but the campaign from certain quarters to cast doubt on the credibility of official data is a dangerous game,” a senior officer reacted.

According to a senior source in the Debt cell, under the PML-N government the external debt increased by 6.25pc per annum and the annual rate of increase in domestic debt was 11.5pc.

He said the total debt increased from $48.1bn in June 2013 to $57bn in June 2016, showing an increase of $9.6bn in three years.

He further stated that opponents of the government are deliberately creating a negative perception by confusing the total debt figure of the country that also includes borrowing by the private sector, provincial governments and public sector enterprises.

“There is a difference between the debt liability of the state and a government,” he said.

Responding to request for a comment on the issue Dr Waqar Masood federal finance secretary articulated the government’s view in detail. He argued that the current government has reduced and not increased the debt liabilities.

Published in Dawn, Business & Finance weekly, January 2nd, 2017


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