Managing public debt: use new window prudently

As country is in IMF programme, it provides opportunity to seriously examine debt restructuring proposals

ISLAMABAD:

"Like people and companies, sovereigns can struggle to repay their debt. This could be because they borrowed too much or in a way that was too risky – or because they were hit by an unexpected shock, such as a deep recession or a natural disaster. In these circumstances, the sovereign needs to restructure its debt."

These words are taken from an introductory article on sovereign debt by S Ali Abbas and Alex Pienkowski, who along with Kenneth Rogoff edited an important volume "Sovereign Debt: A Guide for Economists and Practitioners (2019)".

I recently attended a lecture by Ali Abbas arranged by the Economic Advisory Group, who shared important insights on public debt. I will use these insights to develop my view in light of recent developments.

Government ministers and officials usually take this position that Pakistan is not facing any public debt crisis now, especially after securing the IMF's Extended Fund Facility for 37 months, which came on the back of rollovers guaranteed by China and Saudi Arabia and agreeing on a very stringent package of economic reforms and difficult tax revenue targets. A number which is often quoted by government officials is that Pakistan's debt-to-GDP ratio – currently at 71.8% – is not alarming in comparison with many other countries. Some years ago, we even changed the definition of public debt to exclude the government-guaranteed debt; therefore the debt-to-GDP ratio is not a comprehensive parameter.

In reality, what is far more relevant in our case is the debt repayment percentage of the total revenue, which has now exceeded 60%. We do have a debt crisis, and acknowledgment is the first step.

The new sovereign debt framework that the IMF now advocates is not exclusively a domain of economics and thus quantitative thresholds are not sufficient indicators. A key statement from this framework is worth reproducing. "Public debt can be regarded as sustainable when the primary balance needed to … stabilise debt under both baseline and realistic shock scenarios is economically and politically feasible, such that the level of debt is consistent with an acceptably low rollover risk."

Economic feasibility implies government's capacity to spend on improving productivity, which drives growth, while making debt repayments. Political feasibility implies that government measures should not lead to social unrest. While looking at debt sustainability, we have to look at the prospects of economic growth, which increases our earnings as well as government revenue. At the same time, we have to come up with a comprehensive public expenditure management plan.

In a recent book, a distinguished economist and former finance minister, Dr Aisha Ghaus Pasha, presents a starting point: over 20 years, our tax-to-GDP ratio has remained almost the same, whereas our public expenditure-to-GDP ratio has risen by almost 50%! Therefore, in the first phase, expenditures must be drastically cut, so that fiscal health of the government can be improved without imposing excessive burden on the existing taxpayers or borrowing more. This will stimulate economic growth as pressure on the finance minister to borrow more to sustain the government machinery will ease, diverting credit to the private sector.

As we are now in an IMF programme, this also provides an opportunity to seriously examine debt restructuring proposals. Timely negotiations with domestic and external creditors for a formal schedule, instead of transaction-based requests for rollovers, will be welcome. This will also create opportunities for federal and provincial governments to spend more resources on human development and essential infrastructure, especially to better protect people from natural disasters.

A debt restructuring programme will also reduce pressure on the finance ministry to impose mini-budgets as tax revenue targets will be made more realistic. The current macroeconomic framework, characterised by a significant decline in inflation and consequent reductions in the discount rate, should also be used as a building block for a comprehensive debt structuring programme. Last point is debt justice. In a recent roundtable discussion arranged by the SDPI, it was mentioned that ultimately the burden of debt repayment falls on the general public. This is often echoed in numbers such as debt per capita.

Morally, this is a wrong attribution and just helps to shift responsibility. It makes it convenient for the government and central bankers to take on new debt without any significant legal consequences. It is not the public which should be held responsible for debt repayment; it should be government functionaries. The root of fiscal crisis is not over-spending by our businesses and by our households. The root cause is over-spending by our governments.

It demands adding penalty clauses in the Fiscal Responsibility and Debt Limitations Act. Parliament should bring a constitutional amendment here; it does not have an excuse now.

The writer is the Executive Director of the Policy Research Institute of Market Economy (PRIME), an independent economic policy think tank