Policymakers: Liabilities should be your greatest concern!
Pakistan has historically faced high budget deficits due to general fiscal indiscipline.
Pakistan’s public debt has soared to unprecedented levels, raising red flags. CREATIVE COMMONS
AL AIN:
The onset of the financial crisis and consequent attempts to bail out financial institutions has renewed interest in the nature and extent of the role of government in maintaining monetary and fiscal stability. Government, a captive client of financial institutions, serves as the biggest guarantee for system-wide stability, but its excessive presence poses a burden on fiscal balances.
Pakistan has historically faced high budget deficits due to general fiscal indiscipline, widespread tax evasion due to failures of governance, and a large informal and undocumented economy that manages to breathe outside the tax net. With public expenditures growing fast, this has resulted in an inordinate reliance of the government on external sources and, more recently, on the domestic financial system as a quick and cheap source to finance its deficits. The sad and frightening part of it all is the indifference of our policymakers towards this issue. Recent debt numerics for the country present a particularly worrisome picture – one that should put our policymakers on their toes.
There is no denying the positive impact of finance and debt for growth. It fosters capital investment and aids financial development. However, recent research has shown that domestic debt is growth-enhancing at moderate levels: once the threshold is crossed, debt becomes a drag.
Latest figures reveal that Pakistan’s total debt and liability stock (TDL) has surged to a whopping Rs15.2 trillion by the middle of fiscal 2013, with the total debt-to-GDP ratio standing at 68.8%; largely driven by high fiscal deficits borne since fiscal 2008. Hypothetically speaking, if this amount is the yearend total of debt, each citizen of this nation, including the young ones and old citizens, is indebted by Rs85,000. Given our meagre Rs114,370 per capita income, can an average Pakistani even think of this amount?
Further investigation into the structure of debt reveals that almost 89% of it comprises public debt. Out of this, domestic debt is the largest component, having an almost 60% share. It is domestic debt that is growing at an accelerated pace and can prove inimical towards growth and economic stability.
Domestic debt has ballooned since 2008, registering an average growth rate of 25% per annum in the last five years. This is unprecedented in the country’s history, and such high growth rates were last recorded during the Zia regime in the 80s. Public debt-to-GDP ratio, according to latest figures from the State Bank, stands at 61.2%, thus breaching the 60% limit set under the Fiscal Responsibility and Debt Limitation Act, 2005. And this is not the only caveat that I am writing of today. Red flags are being raised on the fact that more than 50% of domestic debt is short term in nature. ‘Floating debt’, which primarily comprises of market treasury bills of a tenor of three, six and twelve months, is used by the government for borrowing from banks and the central bank.
Government borrowing from the banking system (central bank and other depository corporations) exerting inflationary pressures on our economy has posted a mammoth growth rate of 231.6% in the past five years. Need I say more?
Not only is growth in domestic debt detrimental for economic stability, it also has an impact on a bank’s behaviour. Latest data of institution-wise holding of government securities exhibits that as of February 2013, scheduled banks hold 78.1% of government debt relative to non-banks, which hold 21.9%. Deficit financing from the banking system increased by 116% in fiscal 2012, and its share has grown by 47.6 percentage points in just a decade from fiscal 2002 and fiscal 2012. This has not only dampened private investment, but distorted banks’ incentives to lend to the government due to its supposedly ‘risk-free’ nature. This is also evident by analysing banks’ balance sheets, which shows a clear shift from ‘advances’ to ‘investments’. Moreover, the banking system is faced with higher risk due to the influx of short term maturity debt on their books.
The above facts paint a grave picture. Post crisis there has been much work on sovereign risk and the important role it played in the economic catastrophe that engulfed Greece and Ireland. None of our political parties have even mentioned this critical issue in their manifestos. Now is the time to pay heed to these glaring facts and take immediate steps to save us from any future disasters.
Policymakers, please wake up.
THE WRITER IS AN ECONOMIST AND EX-CENTRAL BANKER
Published in The Express Tribune, May 13th, 2013.
Like Business on Facebook to stay informed and join in the conversation.
The onset of the financial crisis and consequent attempts to bail out financial institutions has renewed interest in the nature and extent of the role of government in maintaining monetary and fiscal stability. Government, a captive client of financial institutions, serves as the biggest guarantee for system-wide stability, but its excessive presence poses a burden on fiscal balances.
Pakistan has historically faced high budget deficits due to general fiscal indiscipline, widespread tax evasion due to failures of governance, and a large informal and undocumented economy that manages to breathe outside the tax net. With public expenditures growing fast, this has resulted in an inordinate reliance of the government on external sources and, more recently, on the domestic financial system as a quick and cheap source to finance its deficits. The sad and frightening part of it all is the indifference of our policymakers towards this issue. Recent debt numerics for the country present a particularly worrisome picture – one that should put our policymakers on their toes.
There is no denying the positive impact of finance and debt for growth. It fosters capital investment and aids financial development. However, recent research has shown that domestic debt is growth-enhancing at moderate levels: once the threshold is crossed, debt becomes a drag.
Latest figures reveal that Pakistan’s total debt and liability stock (TDL) has surged to a whopping Rs15.2 trillion by the middle of fiscal 2013, with the total debt-to-GDP ratio standing at 68.8%; largely driven by high fiscal deficits borne since fiscal 2008. Hypothetically speaking, if this amount is the yearend total of debt, each citizen of this nation, including the young ones and old citizens, is indebted by Rs85,000. Given our meagre Rs114,370 per capita income, can an average Pakistani even think of this amount?
Further investigation into the structure of debt reveals that almost 89% of it comprises public debt. Out of this, domestic debt is the largest component, having an almost 60% share. It is domestic debt that is growing at an accelerated pace and can prove inimical towards growth and economic stability.
Domestic debt has ballooned since 2008, registering an average growth rate of 25% per annum in the last five years. This is unprecedented in the country’s history, and such high growth rates were last recorded during the Zia regime in the 80s. Public debt-to-GDP ratio, according to latest figures from the State Bank, stands at 61.2%, thus breaching the 60% limit set under the Fiscal Responsibility and Debt Limitation Act, 2005. And this is not the only caveat that I am writing of today. Red flags are being raised on the fact that more than 50% of domestic debt is short term in nature. ‘Floating debt’, which primarily comprises of market treasury bills of a tenor of three, six and twelve months, is used by the government for borrowing from banks and the central bank.
Government borrowing from the banking system (central bank and other depository corporations) exerting inflationary pressures on our economy has posted a mammoth growth rate of 231.6% in the past five years. Need I say more?
Not only is growth in domestic debt detrimental for economic stability, it also has an impact on a bank’s behaviour. Latest data of institution-wise holding of government securities exhibits that as of February 2013, scheduled banks hold 78.1% of government debt relative to non-banks, which hold 21.9%. Deficit financing from the banking system increased by 116% in fiscal 2012, and its share has grown by 47.6 percentage points in just a decade from fiscal 2002 and fiscal 2012. This has not only dampened private investment, but distorted banks’ incentives to lend to the government due to its supposedly ‘risk-free’ nature. This is also evident by analysing banks’ balance sheets, which shows a clear shift from ‘advances’ to ‘investments’. Moreover, the banking system is faced with higher risk due to the influx of short term maturity debt on their books.
The above facts paint a grave picture. Post crisis there has been much work on sovereign risk and the important role it played in the economic catastrophe that engulfed Greece and Ireland. None of our political parties have even mentioned this critical issue in their manifestos. Now is the time to pay heed to these glaring facts and take immediate steps to save us from any future disasters.
Policymakers, please wake up.
THE WRITER IS AN ECONOMIST AND EX-CENTRAL BANKER
Published in The Express Tribune, May 13th, 2013.
Like Business on Facebook to stay informed and join in the conversation.