If there is going to be a call for a debt write-off coming from the government of Pakistan, it is entirely fair and proper to expect that it should come from the finance ministry and not elsewhere.
But there is a problem. And it’s not in the language but in the numbers. Just look at the revised budgetary estimates presented by the finance secretary at the Pakistan Development Forum last week.
At the heart of the numbers presented to the donors was the revised fiscal deficit target, brought down to 4.7 per cent from 5.1 per cent. So far so good as most donors will look at expenditure cuts and efforts to raise revenues favourably.
The problem comes when you consider the amounts behind the percentages. A fiscal deficit of 4.7 per cent of the gross domestic product (GDP) means that something in the order of Rs812 billion is going to be added to our stock of outstanding debt by the end of the fiscal year.
Considering our total debt stock is ballpark Rs10 trillion, the size of the deficit this year alone is going to bring that number close to Rs11 trillion.
What is the cost of financing this debt? Even if we take the most optimistic outlook of 12.7 per cent, roughly the price of three-month government paper, the amount comes to just over Rs100 billion. Let’s assume, very optimistically, that this is the cost of carrying 800 billion rupees of debt.
Now look at the new revenue measures announced by the government. Between the flood tax and the excise duty on luxury goods, there is an estimated Rs60 billion of revenue. The provincial governments are expected to raise an additional Rs6 billion.
And then that reformed general sales tax target, after being watered down somewhat, should be netting less than Rs30 billion. These are the most optimistic assumptions.
Now add up the numbers. Notice something? The new revenue measures, even under the most optimistic assumptions, don’t add up to the cost of servicing the country’s additional debt stock from this fiscal year.
What this means is that our cost of debt servicing is going to rise faster than our ability to service the new debt we are preparing to take upon ourselves this fiscal. And we have not even come to the question of fiscal slippages – ‘unforeseen’ expenditure overruns such as power subsidies, growing stock of government-guaranteed public sector liabilities, revenue shortfalls, and so on.
Even in the best case scenario, our debt servicing costs are rising faster than our capacity to pay. And that is what has the donors in a foul mood, and that is what lies behind the repeated calls for a debt write-off.
But the finance team is to be credited with swatting away talk of a debt write-off. We may be close to being the kind of basket case country that gets debt write offs, but we don’t have to be in a rush to get there.
These numbers show that we cannot live with ourselves for much longer at this rate. The big problem is the growing stock of domestic debt that cost us close to Rs580 billion just to service last fiscal year.
With interest rates on the rise and the markets demanding ever higher premiums on government paper, that number is set to go up again this year.
Expenditure cuts are clearly required and many of them have been promised in the revised framework. But you can’t finance yawning debt service costs through expenditure cuts endlessly, since eventually the cuts begin to suffocate growth, which suffocates revenues.
That is the debt trap that we are in. Even a child can look at these numbers and tell you that a restructuring of domestic debt is now becoming inevitable.
The writer is Editor Business and Economic policy for Express News and Express 24/7.
Published in The Express Tribune, November 22nd, 2010.
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