The trillion rupee question

Published: November 29, 2012
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pervez.tahir@tribune.com.pk

pervez.tahir@tribune.com.pk

The leadership of the two main opposition parties has been raising alarm bells over the excessive public debt. The constant refrain is that the country has accumulated more debt in the past four years than it did in the previous 60 years. Imran Khan has been quoting debt figures of five trillion before and 12 trillion now. There are a number of problems with this statement, though not with the question it raises. The rising debt burden is a serious issue and a threadbare discussion about its sustainability, especially by the political class, is only to be welcome. However, the debate should not lose sight of the historical perspective. Facts ought to be marshalled properly and interpreted carefully.

According to the State Bank data, Pakistan’s public debt stood at Rs12.92 trillion in 2011-12. This is the fourth fiscal year of the PPP-led alliance. The Pervez Musharraf regime had left a public debt of Rs6.69 trillion in 2007-08, its last fiscal year. It is clear that the present regime added a huge debt burden of Rs6.23 trillion in its four years. Based on this, one comes across statements suggesting that the present regime borrowed roughly as much as all the previous regimes put together. Loans have different maturities and disbursement schedules. A regime enjoying debt rescheduling, as was the case of the Musharraf regime, is able to show lower debt burdens, than the regime that has to face this burden later. Comparisons in terms of absolute figures, as is happening in the political debate, ignore vast variations caused by the high rates of inflation and rupee depreciation.

Despite

There are a number of ways to look at the debt burden in a fair and comparable manner. The simplest of these are the debt-to-GDP ratio and the ratio of debt servicing to tax revenue. As a ratio of GDP, the Musharraf regime passed on a debt burden of 60.7 per cent. At 62.6 per cent, the present regime has increased the debt burden by 1.9 percentage points. Both exceed the limit of 60 per cent of GDP considered safe under the Fiscal Responsibility and Debt Limitation Act. In fact, 2012-13 is the target year in the Act to achieve this limit. As much as 61.3 per cent of the tax revenue was consumed by debt servicing in 2011-12. The country has come a long way, though, when we recall some past ratios. In 1998-99, the last full fiscal year of the second Nawaz Sharif regime, the debt-to-GDP ratio was 99.8 per cent and debt servicing ate up 87 per cent of the tax revenue. These ratios, respectively, were 52 per cent and 65.4 per cent in 1995-96.

Obviously, all regimes have contributed to the worsening debt burden. As all parties prepare for the elections, their manifesto committees need to deliberate on bringing the primary deficit down to zero. It was two-and-a-half per cent in 2010-11. This is the fiscal deficit before interest payments. The idea is to ensure that real revenue growth is higher than the real growth in debt. In making their medium-term development plans, these committees should worry about the fact that the money spent on interest payments is higher than the development expenditure. Our debt burden is higher than India’s but we are nowhere near Greece (140 per cent) or Italy (119 per cent). Despite fiscal profligacy, it is a tribute to the basic resilience of our economy that we have never defaulted on our debts. Instead of point scoring, the political think tanks should come out with ways to build on this strength.

Published in The Express Tribune, November 30th, 2012.

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Reader Comments (17)

  • Nadir
    Nov 29, 2012 - 10:57PM

    Its not the size of the debt that matters, but the ability to finance it, and what the debt is for. One argument could be made if the debt was being generated to finance development and capital expenditure, that is unlikely as most of this debt is to finance current spending. It obviously did not help the PPP that the rupee fell in value, magnifying foreign debt in terms of rupees, neither did it help that loans rescheduled during Musharrafs rule, payments started to prop up. At the end of the day, the issue comes back to taxation. No one wants to pay taxes, yet everyone wants to consume public goods, they want a massive defence infrastructure, they want electricity and gas to be subsidised but yet no one wants to pay their taxes. Civic sense indeed.

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  • Toticalling
    Nov 29, 2012 - 10:58PM

    It is not the right tim for the government to talk openly about deficit, as the elections are approaching very soon. After the elections, the government must introduce permanent austerity programs. This would not only mean cutting government spending, which is what “austerity” means now, but the real kind: genuine falls in the standard of living of most working people, caused not just by frozen wages and the collapse in the value of savings (due to repeated bouts of money-printing), but also by the shortages of goods that will result from lack of investment and business expansion, not to mention the absence of cheaper goods from abroad due to import controls. We look around the world debt is not uncommon in most of the countries in west and east. Start with USA, Greece, Italy and end with South America. All in the same sinking boat. In my view it will be stop and go as usual with many risks attached. Do not wait for miracles. But there is need to discuss this problem, preferably pragmatically.

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  • Parvez
    Nov 30, 2012 - 12:29AM

    Sir with a head of State and a head of Government both of whom have very little understanding of economic issues ( I am being charitable ), how do you expect them to comprehend the seriousness of the financial mess this government has led this country into.

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  • Naresh
    Nov 30, 2012 - 1:26AM

    As per the State Bank of Pakistan the figure of Pakistan’s Total Debt and Liabilities as on 30-09-2012 is Pakitani Rupees 15,148.1 Billion
    .
    Here is the Link : http://tribune.com.pk/story/472790/the-trillion-rupee-question/
    .
    Cheers

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  • Tribal Manto
    Nov 30, 2012 - 2:12AM

    In-spite of their worst economic conditions, the Europe is the still the best bet in the world. We can take the example of Greece, which is hit hard by the recent euro crisis but her economy is still far more stable than the most thriving economy of third world countries, including South-Asia. It is ironical that why the author compares Pakistan with the advanced European countries. Pakistan’s total public debt stands at over 12.92 trillion, but this is not in local currency alone, it includes the foreign currency i.e. $ as well.

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  • Ammar
    Nov 30, 2012 - 3:09AM

    @Parvez: Wow – you should be the Central Bank Governor, then.

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  • gp65
    Nov 30, 2012 - 3:35AM

    @Toticalling: So you think that the entire burden of fiscal adjustment should be borne by ordinaly Pakistni civilians – no review of defence expenditure? no review of tax exemptions?

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  • Observer
    Nov 30, 2012 - 5:24AM

    The debt to GDP ratio of 60% is correct only if the underlying GDP is the correct number. It has been recorded that Musharraf and Aziz deliberately inflated the GDP number which would mean that the real debt to GDP ratio might be far in excess of the official numbers.Recommend

  • gp65
    Nov 30, 2012 - 7:16AM

    @Observer: “The debt to GDP ratio of 60% is correct only if the underlying GDP is the correct number. ”
    Well another relevant point is what @Nadir stated i.e. debt servicing capacity which depends on tax collection ability of the state. Pakistan’s low tax to GDP ratio of around 9% makes the 60% more onerous than a much higher ratio for another country like US that collects say 26% of its GDP as tax.

    Finally the article says that Pakistan has never defaulted on its debts. If the author had qualified it as never defaulted on international debts, it would have been a correct statement. But domestically all manner of defaults where government failed to honour its contractual agreements have been occurring . The railway pensioners who did not get paid for a while, the DISCOs which had to go to court to get paid are just 2 examples.

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  • Mirza
    Nov 30, 2012 - 9:27AM

    A very fair and balanced Op Ed by a scholar and it shows. The problem with Pakistan is the tiny size of its economy and tax collection. This combined with huge size of army and obsession to compete with nine times greater economy of India is sacrificing the basic necessities of poor civilians. No country with this tiny economy and such huge army can exist in the world. Not even rich European countries have both expensive war toys and huge armies. I am surprised why do Pakistani intellectuals not discuss this fact openly?

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  • Nov 30, 2012 - 11:16AM

    Hey come on, Pakistan has money to expand its nukes, missiles and develop drones but not service debts. Get out of here!

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  • Toticalling
    Nov 30, 2012 - 1:15PM

    @gp65: I did not say what should, but what is going to be. If relations with India improve to an extent that electorate can be convinced of reduction army expenditure, that will be fine. In Pakistan it is important the democratic set up does not get derailed.

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  • meekal a ahmed
    Nov 30, 2012 - 2:57PM

    Good perspective, PT. Yet there is nothing to be complacent about. We may not be Greece but if we don’t change our policies, we will get there.

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  • AHK
    Nov 30, 2012 - 5:49PM

    Figures provided by the Govt.& SBP don’t add up….. If our domestic debt has doubled in 4 years but our Debt to GDP ratio has not moved by much it would suggest that our nominal GDP has also roughly doubled – which is certainly not the case.

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  • Naresh
    Nov 30, 2012 - 8:13PM

    CORRECTION.
    As per the State Bank of Pakistan the figure of Pakistan’s Total Debt and Liabilities as on 30-09-2012 is Pakitani Rupees 15,148.1 Billion
    .
    Here is the “CORRECTED” Link : http://sbp.org.pk/ecodata/Summary.pdf
    .
    Cheers

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  • gp65
    Nov 30, 2012 - 9:45PM

    @AHK: With a 13% inflation and around 3.5% real growth, the nominal growth (in rupee terms) would have been at around 16.5% annually. Compunded over 4 years , it would lead to a near doubling of GDP – though not quite. Hence there is a marginal increase in debt to GDP ratio. Seems like the numbers do add up.

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  • MSS
    Dec 2, 2012 - 12:25AM

    Comparing Pakistan’s debt ratios with Greece or Spain is unfair. Europeans have social welfare programmes contributing towards debt and Pakistan has no such programme. Though Pakistan has never defaulted, without some sort of external support it might have. Eventually budgets have to be balanced whether at home or in the office else creditors come calling.

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