The sixth review under the extended arrangement was uploaded on the International Monetary Fund’s (IMF) website and noted that Pakistan’s domestic debt is largely in local currency and short-term debt with over 50 percent share. Medium-term debt, the review further noted, accounted for less than 20 percent with funding mainly reliant on short-term debt and national savings schemes which provide a relatively captive investor base. In recent weeks the government reduced the return on all saving scheme products but this is unlikely to change investor perception given the dearth of alternate safe schemes by a large number of relatively small investors.
The IMF acknowledges that the government has issued more external debt as part of its diversification strategy – Federal Finance Minister Ishaq Dar has repeatedly stated that he is procuring foreign debt at a rate of around 5 to 6 percent to retire domestic debt procured at over 12 percent – yet public external debt remains largely with official creditors as bonds (no doubt a reference to 2 billion dollar Eurobonds issued at the rate of 7.5 and 8.5 percent) and bank private creditors account for only about 3 percent of the total. Ijara sukuk issue of one billion dollars, the review notes, was issued by the government and purchased by the State Bank of Pakistan (SBP) on a deferred payment basis from commercial banks and sold to Islamic banks absorbing the excess liquidity which is a temporary measure to contract Net Domestic Assets (NDA). Or in other words, the issuance of sukuk was a measure specifically designed to meet the IMF condition of reducing borrowing from the SBP as well as reducing the NDA prior to the release of the fifth and sixth tranches in December last year. Additionally, two more measures were taken to reach the below the end-December ceiling by 86 billion rupees namely issuing 363 billion rupee T-bills and PIBs and the outright sale of SBP holdings of government securities on the secondary market to compensate for the deferred sale of OGDCL.
These are disturbing revelations and support the charges repeatedly levelled by the members of the Opposition that the incumbent government is raising the country’s indebtedness in terms of domestic debt. The trend of relying on borrowing to finance the higher than budgeted current expenditure (given that the government restrained development expenditure) may be attributable to a rise in general public services rather than defence as is normally bandied about if 2013-14 is taken as a yardstick: budgeted defence expenditure was Rs 627 billion while the actual was Rs 629.7 billion while servicing of domestic debt (a component of general public services) witnessed a massive rise. A look at the data revealed in the budget 2014-15 documents shows that the government increased domestic debt servicing from the budgeted 1.064 trillion rupees to 1.108 trillion rupees in 2013-14 – a difference of 44.29 billion rupees – and has budgeted to increase it by another 12.24 billion rupees in the current year – a figure that may be understated if the precedence set by the Sharif administration is any indicator.
External debt servicing, however, is declining reaching 26.2 percent in 2014, which is unlikely to exceed 37 percent, and is expected to see a modest decline in the coming year. This is consistent with relatively stable gross financing needs expected within the range of 2.7 to 3.7 percent of GDP, the review states, and adds that the stress tests indicate that external debt-to-GDP ratio is resilient to any adverse shock though it is deemed to be sensitive to growth and exchange rate shocks. This may partly explain why the government overstates its GDP growth rate and has appreciated the real effective exchange rate by 10.6 percent since the onset of the programme. In addition, the net external programme includes privatisation revenue – a process which has been delayed given the state of the domestic and global economy. And with the PPP opposed to privatisation with the PML-N government increasingly requiring PPP support for its various measures privatisation may be further stalled.
To conclude, the review notes that the government’s debt liability is a little over 63 percent which would be reduced to under 60 percent by 2019 – one year after the tenure of the government expires. While this maybe acceptable to the IMF that argues in favour of all stakeholders being on board for its programmes yet the opposition claims it is not being taken on board with respect to economic policies; besides our politicians have a tendency to blame preceding governments for agreeing to unrealistic targets while an outgoing government blames the next government for failure to reach the targets they agreed to. The way out for Pakistan’s economy remains through improving one of the lowest tax-to-GDP ratios and unfortunately while the government has taken measures to improve revenue generation largely through raising taxes for existing taxpayers yet no meaningful changes have been taken to broaden the tax base and bring those outside the tax net into this net of responsibilities and obligations towards state.