Public debt and debt mismanagement
Pakistan has to fund the current fiscal deficit more via domestic borrowing with declining external borrowing
The writer is associated with the Sustainable Development Policy Institute, Islamabad
Heavy indebtedness is one of the major challenges facing developing countries in the 21st century. In our own country we can see that public debt has increased from Rs12,695.3 billion in 2012-13 to Rs20,538.4 billion in 2016-17. Conventionally, debt is required for sustainable improvement in the living conditions to meet the budget deficit, the expenses of war and other extraordinary situations as well as to finance development activity.
The country’s debt-to-GDP ratio has been increasing from the financial year 2008. This rise has been more in the case of domestic debt which grew over the period more frequently in comparison to external debt. Between 2008 and 2012, domestic debt grew by 32.4% and then by 43.86% during 2013-17, while external debt grew by 27.18% during 2008-12 and 19.8% during 2013-17.
This rise in debt was to finance fiscal deficit. Financing here was termed important as it was done in the form of external loans to supplement the domestic resources required to accelerate the pace of economic development and make positive contributions in developing infrastructure base. These borrowings were also for financing of projects of national importance, budgetary and balance-of-payments support, earthquake and floods, rehabilitation assistance and import of urea and crude oils. Besides budgetary and the balance-of-payments support, the purpose of these loans was to build external buffers to protect against exchange rate volatility and absorb external shocks.
As far as debt servicing is concerned, an increase was seen over the period from 2008-09 to 2015-16 with a majority of the revenue share going towards it. In 2008-09, the value of the rupee depreciated due to the global financial crisis, pushing debt servicing costs up to Rs807.8 billion.
During the financial year 2010-11, Pakistan paid Rs852.2 billion due to stable dollar-to-rupee parity against Rs872.9 billion. From 2011-12 to 2015-16 the percentage of revenue going towards debt servicing fluctuated between 35% and 40% of the revenue. In 2011-12, Pakistan utilised 39.9% of the total revenue (Rs1,024 billion) to pay back which by 2015-16 is found to be 36% (Rs1,599 billion).
Pakistan has to fund the current fiscal deficit comparatively more via domestic borrowing with declining external borrowing. This domestic borrowing has thus created a negative impact on local domestic financial sectors. Since there was an increase in domestic borrowing by the government over the period, this led to a depletion of finances for the private sector. This depletion of financial resources impacted the small and medium enterprises which found it difficult to obtain capital from banks. Similarly, a study carried out in 2011 pointed out that government domestic debt held by banks also resulted in low mobilisation of deposits to fund private sector projects. Thus lack of mobilisation of resources did reduce the investment to some extent.
A study conducted two years earlier showed that public borrowing caused a crowding-out effect due to scarcity of funds in the system. Due to excess liquidity in this case, however the argument of crowding out weakens, ie, public borrowing from domestic sources other than the State Bank does not appear to exert any deterrence on private investment by creating a fund crisis. There are also studies showing that debt influenced investment, manufacturing sector and other key economic variables. This influence of debt thus resulted in a low GDP growth.
As there are studies showing both positive and negative impact of debt, it can be concluded that the case is mostly of debt mismanagement. Debt management in Pakistan is mainly looked after by the finance ministry where dealing with the implementation, monitoring and record keeping is done by the economic affairs division whereas the finance division is looking after policymaking related to debt, the State Bank of Pakistan, the Debt Policy Coordination Office and the Central Directorate of National Savings. Thus looking at one issue by different divisions also results in mismanagement. This mismanagement itself influenced the economy inversely. The inverse impacts are there in the form of high debt-servicing costs which is leading to decreased expenditure on development due to pressure on managing finances.
To manage public debt there are few proposals which should be implemented. First, there is a need for an effective fiscal reforms strategy. This strategy should focus on debt sustainability indicators and should also stress on reduction of associated interest rate risks over its obligations.
Thus to achieve the objectives of debt management, there is a need to take into consideration structural reforms to immediately boost growth. Some other key fiscal policy tools in this regard include tax reforms as tax is an important source of revenue to finance development expenditures and public goods. There is a need to broaden the tax base by bringing more taxpayers with taxable income into the tax net. To increase the tax base there is a need to bring tax harmonisation in the economic culture. There is also need for provinces to increase their tax base. To increase the tax base, provinces should do take into consideration the problem of double taxation which is currently being faced by taxpayers moving or trading from one province to other province. There is also the need to bring in performance-based reward system in the Federal Board of Revenue with the focus on human resource management by capacity building of tax officials. Similarly, in reforming the tax system, the tax body should come up with a comprehensive tax collection system with minimum time to file.
Second, the government should manage its expenditures effectively with the focus on priority areas having capacity to generate employment and improve the overall economic outlook. Similarly, there is need for steps to avoid unplanned and unproductive expenditures which are politically motivated. To control expenditure, the finance ministry should prioritise and investigate duplication of projects and projects with excessive use of monetary resources. There is also a need for the government to remove any un-targeted subsidies that are being rewarded to inefficient sectors. The government should incentivise investors by providing improved business and investment climate.
Third, the government should not part ways with the Fiscal Responsibility and Debt Limitation (FRDL) Act and the limits defined in it. It should follow a stringent debt management strategy and moderate fiscal resources effectively. The government should also consult parliament before making any amendment to the FRDL Act. It should also make all possible efforts to retire debts with expensive servicing requirements.
Published in The Express Tribune, September 30th, 2017.
The country’s debt-to-GDP ratio has been increasing from the financial year 2008. This rise has been more in the case of domestic debt which grew over the period more frequently in comparison to external debt. Between 2008 and 2012, domestic debt grew by 32.4% and then by 43.86% during 2013-17, while external debt grew by 27.18% during 2008-12 and 19.8% during 2013-17.
This rise in debt was to finance fiscal deficit. Financing here was termed important as it was done in the form of external loans to supplement the domestic resources required to accelerate the pace of economic development and make positive contributions in developing infrastructure base. These borrowings were also for financing of projects of national importance, budgetary and balance-of-payments support, earthquake and floods, rehabilitation assistance and import of urea and crude oils. Besides budgetary and the balance-of-payments support, the purpose of these loans was to build external buffers to protect against exchange rate volatility and absorb external shocks.
As far as debt servicing is concerned, an increase was seen over the period from 2008-09 to 2015-16 with a majority of the revenue share going towards it. In 2008-09, the value of the rupee depreciated due to the global financial crisis, pushing debt servicing costs up to Rs807.8 billion.
During the financial year 2010-11, Pakistan paid Rs852.2 billion due to stable dollar-to-rupee parity against Rs872.9 billion. From 2011-12 to 2015-16 the percentage of revenue going towards debt servicing fluctuated between 35% and 40% of the revenue. In 2011-12, Pakistan utilised 39.9% of the total revenue (Rs1,024 billion) to pay back which by 2015-16 is found to be 36% (Rs1,599 billion).
Pakistan has to fund the current fiscal deficit comparatively more via domestic borrowing with declining external borrowing. This domestic borrowing has thus created a negative impact on local domestic financial sectors. Since there was an increase in domestic borrowing by the government over the period, this led to a depletion of finances for the private sector. This depletion of financial resources impacted the small and medium enterprises which found it difficult to obtain capital from banks. Similarly, a study carried out in 2011 pointed out that government domestic debt held by banks also resulted in low mobilisation of deposits to fund private sector projects. Thus lack of mobilisation of resources did reduce the investment to some extent.
A study conducted two years earlier showed that public borrowing caused a crowding-out effect due to scarcity of funds in the system. Due to excess liquidity in this case, however the argument of crowding out weakens, ie, public borrowing from domestic sources other than the State Bank does not appear to exert any deterrence on private investment by creating a fund crisis. There are also studies showing that debt influenced investment, manufacturing sector and other key economic variables. This influence of debt thus resulted in a low GDP growth.
As there are studies showing both positive and negative impact of debt, it can be concluded that the case is mostly of debt mismanagement. Debt management in Pakistan is mainly looked after by the finance ministry where dealing with the implementation, monitoring and record keeping is done by the economic affairs division whereas the finance division is looking after policymaking related to debt, the State Bank of Pakistan, the Debt Policy Coordination Office and the Central Directorate of National Savings. Thus looking at one issue by different divisions also results in mismanagement. This mismanagement itself influenced the economy inversely. The inverse impacts are there in the form of high debt-servicing costs which is leading to decreased expenditure on development due to pressure on managing finances.
To manage public debt there are few proposals which should be implemented. First, there is a need for an effective fiscal reforms strategy. This strategy should focus on debt sustainability indicators and should also stress on reduction of associated interest rate risks over its obligations.
Thus to achieve the objectives of debt management, there is a need to take into consideration structural reforms to immediately boost growth. Some other key fiscal policy tools in this regard include tax reforms as tax is an important source of revenue to finance development expenditures and public goods. There is a need to broaden the tax base by bringing more taxpayers with taxable income into the tax net. To increase the tax base there is a need to bring tax harmonisation in the economic culture. There is also need for provinces to increase their tax base. To increase the tax base, provinces should do take into consideration the problem of double taxation which is currently being faced by taxpayers moving or trading from one province to other province. There is also the need to bring in performance-based reward system in the Federal Board of Revenue with the focus on human resource management by capacity building of tax officials. Similarly, in reforming the tax system, the tax body should come up with a comprehensive tax collection system with minimum time to file.
Second, the government should manage its expenditures effectively with the focus on priority areas having capacity to generate employment and improve the overall economic outlook. Similarly, there is need for steps to avoid unplanned and unproductive expenditures which are politically motivated. To control expenditure, the finance ministry should prioritise and investigate duplication of projects and projects with excessive use of monetary resources. There is also a need for the government to remove any un-targeted subsidies that are being rewarded to inefficient sectors. The government should incentivise investors by providing improved business and investment climate.
Third, the government should not part ways with the Fiscal Responsibility and Debt Limitation (FRDL) Act and the limits defined in it. It should follow a stringent debt management strategy and moderate fiscal resources effectively. The government should also consult parliament before making any amendment to the FRDL Act. It should also make all possible efforts to retire debts with expensive servicing requirements.
Published in The Express Tribune, September 30th, 2017.