The PML-N government says that the economy is finally out of troubled waters and all set for smooth sailing. But many well-known and respected independent economists have challenged the government’s claims. Some major red flags have been cited -- from the fast-rising expensive public debt to the falling exports. Each side has its own figures to back its position. But the PML-N’s economic czars, despite playing with numbers and running expansive feel-good media campaigns, appear to be fast losing the battle of narratives. The ground realities are biting the common man hard and experts know that Pakistan’s economy is still on a slippery slope.
Here we have pitted Finance Minister Ishaq Dar’s assertions about the rising economy versus the incisive analysis of one of Pakistan’s distinguished economist and former federal minister Dr Hafiz A Pasha, who says that our economy still remains in choppy waters.
All is well!
“When the present government started its term in June 2013, it inherited challenges like large fiscal deficit, rising debt burden, unfavourable balance of payments, low foreign exchange reserves, poor growth in tax revenues with shrinking tax-base, swelling current expenditures, a gigantic circular debt that was unravelling the energy sector, flight of capital, weakening exchange rate and perilously declining investors’ confidence… One of the main challenges was absence of external financing which was causing turbulence in the domestic exchange markets and tilting the composition of public debt towards domestic debt and that too into shorter maturities, creating vulnerabilities and entailing high rollover and refinancing risks. State Bank of Pakistan (SBP) Forex reserves, which stood at $6 billion in June 2013 fell to $2.8 in February 2014. It was a highly precarious situation for the external account.
In early 2013, it was predicted that the country might default on its sovereign obligationans, the government took necessary steps for avoiding default, ensuring fiscal discipline and consolidation, stabilising a collapsing economy and accelerating growth… the government started revamping the economy through structural reforms and stabilisation measures such as reduction in un-targeted subsidies, broadening the tax base, restructuring the Public Sector Enterprises, building foreign exchange reserves and reducing the fiscal deficit.
“Many detractors of the government are ceaselessly creating doubts about the debt situation of the country. There is… a need to set the record straight.”
The fiscal consolidation paved the way for a reduction in the debt-to-GDP ratio, which fell from 64 percent in FY2012-13 to 63.5% at the end of FY2014-15. In the next three fiscal years, our target is to bring down the debt-to-GDP ratio to 60%, or less in accordance with the provisions of the Fiscal Responsibility and Debt Limitation Act (FRDLA), through effective fiscal and prudent debt management… Our government’s vision is to further reduce the statutory debt limit from existing 60% to 50% in 15 years, starting from FY2018-19 and to limit statutorily the federal fiscal deficit to 4.0% through introduction in the Parliament of an amendment bill for necessary changes in the FRDLA.Debt-to-GDP ratio
Setting the record straight
Despite these achievements, many detractors of the government are ceaselessly creating doubts about the debt situation of the country. There is… a need to set the record straight.
Pakistan’s total public debt as of 30-06-1999 was Rs2,946 billion of which domestic public debt was Rs1,389 billion and external debt was Rs1,557 billion. Total public debt as of 31-03-2008 was Rs5,800 billion which included domestic public debt of Rs3,020 billion and external debt of Rs2,780 billion. Public debt further increased to Rs14,318 by the end of FY2012-13, thereby the previous government contracted net debt of Rs8,518 billion during its term 2008-13.
Pakistan runs a persistent fiscal deficit. For FY2012-13, the country’s fiscal deficit was projected at 8.8% of GDP. It was due to a major effort during the last month of the FY2012-13 that we were able to contain it at 8.2%. Such a high level of fiscal deficit is unsustainable…
The government started its first fiscal year in 2013 with inherited total public debt of Rs14,318.4 billion comprising of external public debt of $48.13 billion (Rs4,796.5 billion) and domestic public debt of Rs9,521.9 billion. During the period from July 2013 to December 2015, the total public debt has grown to Rs18,467.3 billion out of which the external public debt is $53.36 billion (Rs5,589.2 billion) while domestic public debt is Rs12,878.1 billion. Thus, there is a net increase of Rs4,148.9 billion in total public debt, inclusive of $5.23 billion of external debt.
The reason our government was able to achieve a lower level of borrowing was that we kept the fiscal deficit under control by enforcing fiscal discipline.
The government entered into an Extended Fund Facility (EFF) with the IMF in September 2013 with estimated total amount of $6.6 billion… The government has successfully completed 10 quarterly reviews and is on track to complete the reforms programme by September 2016. The economic reforms being implemented are homegrown and were part of the manifesto of Pakistan Muslim League-N for general election 2013…
There were two reasons for entering into IMF-supported Extended Fund Facility… Firstly, the necessity of major repayment of loan taken by the previous government under the Stand-By Facility and secondly, to restart full scale business with other multilateral development partners which suspended support to Pakistan.
There is a perception that the major part of forex reserves accumulation has been done by way of contracting expensive external debt, especially Euro Bonds, which again is a patently flawed understanding of facts. The cost of Euro bonds… ranges from 7.25% to 8.25%. Pakistan re-entered the international capital market in April 2014 after a gap of seven years to seek additional funding on the basis of its improved macroeconomic indicators in order to avert the predicted June 2014 default of Pakistan.
Furthermore, a successful capital market transaction helps in opening other vistas for seeking foreign funding and foreign direct investment.
Furthermore, large portion of the Forex loans were contracted at extremely low rates… This is evident from the average cost of the total external debt obtained…till December 2015, which comes to around 3.3 percent.
…some quarters are quoting an incorrect number of external public debt. There is a need to understand the difference between External Public Debt and Total External Debt and Liabilities of the country. External Public Debt stood at $53.4 billion, as at end-December 2015, while at the same time the total external debt and liabilities of the country were $68.5 billion. Total external debt and liabilities include debt of other sectors which by definition are not considered as public external debt since the government is not liable to pay these obligations.
A misconception commonly spread is that the CPEC will result in increase in public external debt to $90 billion by 2018. This is neither based on facts nor on a proper understanding of debt dynamics. First, a wrong base number of $66 billion is being used to arrive at the $90 billion number.
Secondly, out of the total CPEC package of $46 billion, a major share of $35 billion is in the private sector, mostly in power generation.”
Extracts from a recent article by Finance Minister Ishaq Dar — the PML-N government’s economic performance.
From Bad to Worse
Former federal minister and one of Pakistan’s leading and most respected economist, Dr Hafiz A Pasha in an interview with ‘Narratives’ explains the risks to Pakistan‘s economy under the PMLN government.
In a recent article, Finance Minister Ishaq Dar claimed that “government detractors are ceaselessly creating doubts about the debt situation.” Should the rising public debt be a source of alarm?
Today Pakistan’s public debt is 65 percent of its economy (GDP). This remains in violation of the law passed by parliament in 2005 which capped it at 60 percent. So far the government has presented no plan to bring it down. What is more worrying is the fact that there has been an increasing reliance on high-cost external debt — Euro and Sukuk bonds — over the last couple of years. These bonds are being offered at a higher cost, increasing our economic risk. The debt situation, I am afraid, hasn’t been controlled. In fact, it has become worse. And in the coming years, it can get even worse.
You predicted that Pakistan’s external debt servicing is likely to get unsustainable. Is the government taking steps to avoid this looming challenge?
During the last three years, $3.5 billion dollars have been borrowed at high cost. Then, under the China-Pakistan Economic Corridor (CPEC), Pakistan will get greater access to borrow from the Chinese banks. This is wonderful because Pakistan will be able to invest in sectors such as energy and transport. But we are giving sovereign guarantees on these projects. Within the next three years, our external public and private debt could exceed $90 billion. We must have debt servicing capacity to repay this debt. Unfortunately remittances have stopped growing. In March, they fell by 8 percent. That means remittances are not a future growth source. Therefore, Pakistan must launch a vigorous drive to increase exports. If we fail to increase exports by 50 percent over the next three years, it will be seriously difficult for us to honour debt obligations — both public and private.
The finance minister calls it a “misconception that [the] CPEC will increase public debt to $90 billion.” Your take?
He is right in the sense that most of the CPEC money is assigned to the private sector. There is a public sector component, which is basically the transport corridor and the Gwadar Port. That’s about $11 billion. It means that external debt will increase by $11 billion. We are contracting about $35 billion worth private project debt with Chinese banks which will be repaid in dollars. It is unusual for Pakistan to offer sovereign guarantees on private projects. This is a worrying factor.
According to our law, these guarantees can’t exceed 2 percent of the GDP. Today, they are close to 3 percent. By the time the CPEC projects are completed, they will be way above the ceiling. This exposes us to high risk and could trigger a balance of payment crisis.
There is a perception that forex reserves accumulation has been done mainly by contracting expensive external debt. The finance minister rejects this perception.
When the government came into power, our reserves were $6.0 billion. Today they are around $16 billion. How did this $10 billion increase occur? The break-up is simple; we got $3.5 billion through Euro and Sukuk Bonds sale, $2.0 billion from the IMF and $4 billion from traditional donors. That adds up to $9.5 billion. So over 90 percent increase in reserves has been through external borrowing. That is a large liability. We will have to ensure that we can honour it.
What are the key mid- to long-term challenges for Pakistan (although the finance minister gives the impression that the PML-N government has put the economy back on track)?
There are several serious mid- to long-term challenges. Our growth rate has not recovered, and remains pegged at 3.5 to 4 percent. With this growth rate, we are unable to provide employment, particularly to young graduates. This creates instability and has the potential to breed extremism and terrorism.
The turbulence in the international market also affects us. The commodity prices have crashed; oil prices are perhaps at an all-time low in real terms. Prices of our export items including, textiles and rice are on the decline. This year, Pakistan’s exports declined by almost 14 percent. There is a trade war going on. Many countries are trying to get a bigger market share n a slow-growing market by competitive devolution — which we haven’t done.
On the domestic front, our agriculture sector is in crisis. We have lost almost 30-35 percent of cotton output. We must strongly focus on agriculture, which has been neglected for the last two decades. If we fail to do so, poverty will increase in villages.
Let’s take the sluggish economic growth first. Do you think that the government could have done better?
The IMF has forced the government to focus on stabilisation and follow an anti-growth path by tightening fiscal and monetary policies. We made massive cuts in public-sector spending. This year, the combined public-sector development programme of the provincial and federal governments was around Rs1.5 trillion. After negotiations with the IMF, this was slashed to just about above a thousand billion. This has been the pattern over the last two years. As a result, the stimulus provided to the economy through development spending plus expansion in the productive capacity hasn’t taken place.
Indiscriminate taxation — done in desperation to raise revenues — also hit us hard. We have gone for oppressive indirect taxation. Our industries contribute 80 percent in taxes. It is not surprising that their growth has been stunted.
The government’s tax amnesty scheme doesn’t appear to be attracting new taxpayers.
This scheme is meant for traders. Under the scheme, one pays one rupee tax for declaring 100 rupees. It appears as an attractive scheme, but unfortunately the reaction has been disappointing. Even after the extension of the amnesty deadline a number of times, less than 10,000 people have been registered. There is a lack of trust in the FBR and people fear its corrupt officials.
The question is: how do we increase the direct tax revenues? First, many Pakistanis have enormous investments abroad including Dubai, UAE. We have a double taxation agreement with those countries. The time has come for us to start taxing investments made abroad by resident Pakistanis.
The second area of our focus should be capital gains tax. We are unable to tax the massive capital gains in properties and share prices; this is how we will be able to increase in the number of taxpayers. Today only one in about 300 Pakistanis pays income tax.
How do you see the investment climate in Pakistan? Private sector credit has failed to take off because the government remains the biggest borrower.
The problem is that the government has been borrowing intensively from the banking system to finance fiscal deficit. This has left little credit for the private sector. Fortunately, in the first nine months of this year, private sector credit expanded a little and interest rate have come down. But private investors are shy because of many other reasons. For one, globally direct investment is declining because the world’s economy isn’t strong. About 30 percent decline has taken place globally. In the Pakistani context, other factors are terrorism, corruption and poor-quality governance. The cost of doing business in Pakistan has been increasing.
How has this government fared on energy sector reforms?
It’s disappointing. One of the PML-N’s strongest commitments at the time of elections was that it would solve the problem of ‘loadshedding.’ And here I am giving this interview when there is no electricity in my house. Power outages occur every alternate hour here in DHA Lahore; so there is little improvement on this front. The power sector remains as problematic as it was. Transmission, distribution and billing losses have not come down significantly. The power sector’s circular debt has again soared. When the PML-N came to power, it retired circular debt of around Rs480 billion.
Today it is Rs660 billion. This is a mega failure at a time when the cost of fuel has dramatically dropped. The furnace oil prices are down by 40-45 percent. The pace of establishing new power projects is also very slow.
Will the Panama Scandal hurt investment sentiment given the fact that the country’s first family keeps its wealth and property outside the country?
It is indeed unfortunate and sends a wrong signal. The head of a government establishing offshore accounts and investing in property elsewhere shows that he lacks confidence in his own country.