The loans would protect the government against international debt obligations for three years, says Finance Minister Ishaq Dar. PHOTO: PID
ISLAMABAD:
In a bid to avoid a potential financial default, Pakistan will seek $12 billion in loans from international financial institutions to retire its previous debts and to try its luck with international and domestic bond markets to finance its mega projects.
Speaking at a news conference on Monday, Finance Minister Ishaq Dar said the fresh loans would be secured over the next three years. The loans would protect the government against international debt obligations for three years, he added.
However, he claimed that the fresh loans would not increase the overall debt stock.
According to the finance ministry, the debt-to-GDP ratio is already nearing 63.5%, far above the legally permissible limit of 60% of GDP. In the past five years, the country obtained loans from the International Monetary Fund (IMF), World Bank, Asian Development Bank and Islamic Development Bank.
Finance Minister Dar said Pakistan met all prior actions for a $6.6 billion IMF bailout programme while the last action has been met by half and the rest would be implemented by the State Bank of Pakistan very soon.
The IMF Executive Board will meet on Sept 4 to approve the loan, he added. “In the first year, the IMF will give $2.2 billion to Pakistan while Islamabad is scheduled to pay back over $3 billion,” he added.
Showing concerns over the low level of foreign exchange reserves, Dar said the government could not survive on the same reserves as after arranging funds for three years, it would need to find ways to increase the reserves.
Without disclosing the amount, Dar said Pakistan would launch exchangeable bonds in the international market to build reserves.
He said the government was also planning launching ‘infrastructure sovereign bonds’ to raise money for mega development projects. The government has already announced to enlist treasury bonds at the stock market.
The minister vowed that the government would observe financial restraint. In the first month of the new financial year, the government almost remained within the budgetary targets, Dar added.
PPP government budget deficit
Announcing the budget deficit for the fiscal year 2012-13, Dar said the deficit remained at Rs1.835 trillion or 8% of GDP. Against the total income of Rs2.982 trillion, all federal and provincial governments spent Rs4.816 trillion, showing a gap of Rs1.835 trillion.
On the eve of budget, the Pakistan Peoples Party government announced a budget deficit of Rs1.1 trillion or 4.7% of GDP. After taking over the finance ministry, Dar had claimed that the PPP government’s last year budget deficit would surge to Rs2.014 trillion or 8.8% of GDP.
Dar said less development expenditures by federal and provincial governments and Rs54 billion savings by the four provinces resulted in 8% deficit against revised estimates of 8.8%. He said the federal development spending remained at Rs344 billion against allocation of Rs360 billion while the combined development spending by four provinces remained at just Rs371 billion. The finance minister said the federal budget deficit remained at 8.2% of GDP or Rs1,890 against the annual target of 5% of GDP.
Published in The Express Tribune, August 27th, 2013.
COMMENTS (24)
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@Travel_Tart: This seems to me a good starting plan. Would defense dept go along it. I very much doubt it. If govt decrease by 10% allocation to all departments including defense , would that help? At the same time , they could plan to increase the tax base by 10% each yr I think this 10% solution will help. It should not hurt. This way whatever money is saved, can be used to pay off these loans.
On the other hand, all the previous loans given to any body must be paid back.
It is sad but there is no option in the short term. So please stop criticising. As a citizen, I had something similar situation with credit card companies and I had to do this for a short time till I increased my income and got out of it. . Savings will help as well. Make your defence budget half to get few billion dollars. Pakistan can also give valuable skills to those who are going overseas so that they send bigger amounts back home. Currently I see Pakistanis in Europe who have degrees and masters from Pakistan but cannot even repair a shoe. On the other hand, their degrees and masters are just repetition of certain subjects. If they are, say, ACCA they could get decent jobs. Even if they are MA English, their level of spoken English is not good enough to get them jobs as English teachers worldwide. . Pakistanis are selling wheat, mangoes, rice but buying expensive items like Laptop, mobiles etc. . This loan arrangement will save the neck for three years. For the long run, please start making something valuable within next 3 months. Selling rice, wheat and onion will not bring you much money back! I hope laptop production scheme works well. Why not make your own smart phone to save money on their imports?
@Mirza: You are very right. This should be the way to do it. Finance minister Mr Dar knows this too. I do not understand why he does not do this way. With the present plan , foreign loans amount will keep on increasing as it has doubled in the last five yrs ( loan amount has almost doubled in the last five yrs) One should learn from the history.
Can we broaden the tax base first and borrow later? Let us stop making excuses and passing the buck. When Mush took over the country was close to default. When Mush was forced out we heard this same line. Now with this new govt we are hearing the same old song.
First cut down non-productive expenses, increase tax base, then borrow. If the govt cannot control/tax bribes, underground economy and other ill-gotten wealth then put a heavy consumption tax. People who use armed guards, large multiple cars, big or multiple homes, major purchases must pay taxes. They can hide their incomes but they cannot spend it without paying consumption tax. Nobody would complaint when extra taxes are imposed on luxury hotels, foreign trips (except poor students on scholarship), etc.
There is good logic to what Mr. Dar is doing. The new loan need not be repaid because it is just in exchange for the old loan. The old loan ?????? Well, it has been repaid by the new loan.
@Haris Chaudhry: No changes in law required FBR should make the National Identity Card the National Tax card and a data base of all expenditure by individuals whether acquisition of cars or plots payment of bills for gas electricity telephone etc be compiled and notices issued based on this definite information to reconcile expenditure with income returned. This should be across the board to Government servants judges generals politicians and all professionals traders and agriculturists. The Rupee deficit of over a trillion rupees can be significantly bridged this way. FBR personnel should have more IT savvy professionals and less bureaucrats. The solution is in the intelligent and impartial use of information technology.
Hmm it's risky but I can understand the logic behind this move. Pakistan would have to increase its tax net and generate more sources of income in order to survive. This plan will give Pakistan some fiscal space to carry out this effort to increase income. All the best to Mr Dar. Thanks.
@SHB: You are very right that government should generate internal resources, but brother that doesnot happen in two three months or in an year, and these loans are to be paid now. When PPP took the loan they should have used that to do what you are saying.
So the only option is to take more loans or default.
@Sharj:
How? Please explain if you are really such an expert.
Pakistan's great economist was instrumental in formulating HDI , I'm sure Pakistan have more such economists. Can't you people find proper economist instead of accountant to head the economy ? Accountant will just keep on juggling funds taken from there and then paid somewhere else . Accountants don't know anything about opportunity costs.
You can task an accountant to do money laundering, but you can't ask him to run the economy. He will be as clueless as this fellow.
Can all of you armchair commentators / standup comedians (above) please provide a better alternative on how NOT to default on the existing loans without new borrowings ! Defaulting means that your rupee will go down from 100/ dollar to 1,000/ dollar, your factories would close, unemployment would skyrocket and the country will implode !
It is a sound policy where the government is buying time to implement new fiscal measures and need to keep the country going without claiming it officially as "gone under or bankrupt".
Take a chill pill guys and learn a thing or 2 about economics !
@Sharj: As an experienced finance professional you should know that Pakistan's tax to GDP ratio is much lower than the developed countries you are comparing Pakistan to. And Pakistan has to pay for imports in foreign currency. It doesn't have euros, yen or USD that it can print at will. So you are comparing apples to oranges.
There has been no move to widen the tax base. Why haven't they brought agriculture and real estate into the tax net? Where is the much trumpeted RGST?
The only concrete step this government has taken so far is the increase in electricity bills. And the major portion of that will only start from Oct. They may yet roll back that change if people start protesting in Nov. Even if they manage to stick with it 2/3rds of domestic consumers, i.e. those using less than 200 units, will continue to enjoy a subsidy.
Taking loan to discharge loan?They are going to make Pyramid economy.If the businesses could run like this,every one would be a millionaire.I am speechless.May God bless people of Pakistan
I am not a finance person but what I understood is following. Govt is taking more loans to pay the old one's but this is not right. It will increase the future liability Govt should generate more internal resources just like the western govts do. They tax their super rich people heavily and their is no distinction from where the income was earned. Like any body in Pakistsn, who makes more than Rs ten million per yr must be taxed at 50% rate. That will generate good income for the govt. if these rich people can send their children to overseas for education and pay $50 to 60,000 per yer for the next four to five yrs, what is wrong with them that they can not pay tax to the govt. Any body has any other idea?
Quite an achievement to convince IMF on such short order. For the uninformed readers Pakistan Debt to GDP is much better than many developed countries, including the US. Borrowing money per se is not a bad thing. Let's please stop with uneducated responses and populist slogans like 'kashkol tor diya'. Borrowing more money is the only solution. In fact so long as they can increase the tax base, they should borrow more and spend on infrastructure and power projects.
As an experienced finance professional, I can assure you this government seems to be making all the right moves. Irrespective of party affiliations lets try to have a more positive outlook and hope Pakistan manages to get its house in order over the next 5 years.
Great job! Finally Pakistan is on it's way to become an Asian Tiger. Roshan Pakistan Zindabad! Paying old loans with new loans, i wish we could thought of that before. We need more intellectuals like this guy.
which genius came up with the idea to take new loans to pay old loans.
Well done Mr. Dar! Borrow more to retire the current debt. So that, you become victorious and your successor will borrow $ 32 billion to retire this debt.
"Dig more holes to fill the existing ones", what an idea Sir g!
.Let me understand this “In the first year, the IMF will give $2.2 billion to Pakistan while Islamabad is scheduled to pay back over $3 billion,” he added.- the govt will borrow 2.2 and return 3. So they will Tell the IMF give me the cheque - return the cheque right then and there and borrow somewhere else to pay the .8. WOW ...now thats pakinomics..lmao
lmao ...I can't stop laughing ..someone please pinch me ...NS was going to build an underground train system in Karachi and lahore...god plz ...I have tears in my eyes...sorry my pakistani brothers but your govt is like a comedy show that never ends...geez...