Deadly debt trap

The only way to come out of prevalent economic mess is to accelerate growth and enhance tax revenues

By Huzaima Bukhari & Dr. Ikramul Haq

Pakistan trapped in deadly ‘debt prison’ needs concentrated short and long term efforts to come out of it. Unfortunately, till today no workable plan and viable strategy is devised by the government or any political party in opposition to tackle the issue. The debt burden — Rs14.5 billion internal and $60 billion external — is becoming unmanageable as major resources are consumed by debt servicing. The budget allocation of Rs1.52 trillion for retiring public debt and payment of interest during fiscal year 2013-14 would prove short as there was surge of Rs180 billion in external debts alone during July 2013.

On July 29, 2013, the rupee recorded its lowest value against the dollar: Rs102.4 in the interbank market, Rs104.7 in open market, but actual rate was Rs105.5. Continuous slide of the rupee is not merely due to widening demand-supply gap or maneuverings by unscrupulous elements. Other factors are external debt repayments of around $1billion and speculations about official devaluation in the wake of IMF bailout.

Devaluation will have devastating effects e.g. tremendous surge in public debt (one rupee loss in the exchange rate adds Rs60 billion to public debt), enhancement in debt servicing, further widening of fiscal deficit and more expensive imports, especially of crude oil raising cost of all goods and services.

Already huge debt servicing is taking a heavy toll on economy — fiscal deficit for financial year 2012-13 jumped to 8.8 per cent of GDP as shortfall on the part of Federal Board of Revenue (FBR) alone was Rs442 billion. The fast depletion of foreign exchange reserves — from $14.776 billion in July 2011 to $5.153 billion by July 2013 — aggravated the situation. Heavy repayments to the IMF and others plus financing of current account deficit amounting to $2.3 billion in 2012-13 forced the new government to approach the IMF for a bailout package.

The situation on internal debt is equally disturbing. The government, for the first time in the history, borrowed from local banks Rs one trillion during the fiscal year 2012-13. The net government borrowing from domestic banks increased to Rs1.012 trillion between July 1, 2012 and June 28, 2013 against Rs629.9 billion over the same period last fiscal year. The federal government borrowed Rs1.005 trillion for budgetary support as compared to Rs696.5 billion during the corresponding period fiscal year.

The reckless and unabated borrowing from commercial banks is not only retarding growth but also depriving private sector of the much-needed funds for investments. It is but also forcing State Bank of Pakistan (SBP) to inject heavy amounts of liquidity in the banking system through frequent open market operations as high borrowings wipe out liquidity from the money market.

The only way to come out of prevalent mess is to accelerate growth, generate employment, enhance tax revenues, and stop financing luxuries of elites and losses of public sector enterprises (PSEs). But the present government, like the PPP-coalition government, is not serious about it. During its election campaign, the Pakistan Muslim League-Nawaz (PML-N) made tall claims that on assuming power it will get rid of the “cancer of external debts”.

However, the PML-N government is knocking the doors of international lenders more vigorously than the PPP. Besides the IMF’s lending of $5.3 billion to pay off previous loan, Finance Minister Ishaq Dar is approaching Asian Development Bank and World Bank for further borrowing. The main priority of the government is to rely more on external borrowing than mobilising own resources.

Internal debt is now 68 per cent of GDP breaching the limit of 60 per cent imposed under the Fiscal Responsibility and Debt Limitation Act 2010. The law requires the government to prepare and revise the debt management policy every year in January but nothing has been done as there is no debt reduction plan. Making things worse, the government is not inclined to impose fiscal discipline and reckless borrowing continues to pay off liabilities of the corruption-ridden inefficient PSEs. According to SBP, the funding of PSEs has hit economy heavily, increasing the stock of total debt & liabilities (TDL) by Rs500-600 billion.

All the governments — civil or military alike — have failed to end debt enslavement by raising revenues even to the extent of Rs6 trillion, though actual potential is not less than Rs8.5 trillion [complete roadmap was given in Taxing targets, The News, August 26, 2012]. Unless it is done, Pakistan can never come out of the ‘debt prison’.

The Senate was informed on January 23, 2013 that over 3.39 million individuals had National Tax Numbers (NTNs), but only 885,999 filed their returns. The former finance minister, Abdul Hafeez Sheikh, admitted that the number of income tax filers had drastically reduced to 1.6 million by 31 December 2012. The Senate was told that “a large number of businesses and individuals, who were regularly filing their income tax returns, are now avoiding their legal obligations by either under-declaring or incorrectly declaring their assets and incomes”.

After admitting widespread tax non-compliance, no action was taken against any official of the FBR. There is no will to eliminate wasteful spending on monstrous government machinery and inefficient PSEs. The way the government is moving our foreign debt would reach US$75 billion in 2015 and domestic debt would be Rs22 trillion. The policies of appeasement towards tax evaders, money-launderers and plunderers of national wealth and monopolisation of resources by Riasti Ashrafiya (state aristocracy) have pushed the country towards disaster.

The word ‘austerity’ is not in the dictionary of state aristocracy — indomitable military-judicial-civil complex and men in power. The habit of living beyond means — our national addiction — has turned the nuclear-powered Pakistanis into a nation holding the beggar’s bowl. When foreign lenders see the lifestyle of our ruling elite, they immediately show indignation — it is hard to believe for them that the rulers of a nation surviving on borrowed funds can display such flamboyance.

The reluctance to collect taxes from the rich and mighty, rather giving them free benefits and perquisites at state’s expense, is worsening the miseries of the poor. There is no scarcity of resources as propagated by the rulers to shift blame on others, but the real cause is outlandish living of the elites off taxpayers’ money [‘Public parasites’, The News, July 21, 2013]. Look at residences of judges, generals and high-ranking civil officials with army of servants and fleet of cars.

Wasteful spending on state aristocracy and unwillingness to tax the rich is playing havoc with the economy. Behind the present chaotic socio-economic and political situation in Pakistan, amongst other factors, is an ever-widening gulf between the rich and the poor. With every passing day more and more people are being pushed below the poverty line — their total number is now not less than 60 million in a country where rulers unashamedly waste billions on their comforts and personal security.

The present crisis testifies to the failure of power-hungry, money-greedy politicians and incompetent, inefficient and corrupt bureaucrats. Even the so-called technocrats always take the first flight to Washington after creating mess — where are Shaukat Aziz and Abdul Hafeez now? In this bleak scenario, Riasti Ashrafiya is not ready to surrender extraordinary perks and privileges enjoyed by them at the cost of taxpayers’ money. How can rulers and bureaucrats living in fortified containments, completely oblivious of the ordinary people’s plight, feel the pinch of life’s hardships?

We cannot come out of debt-enslavement unless we restructure our state on the principle enshrined in Article 3 of the Constitution — from each according to his ability, to each according to his work. For this, everyone should be given work and fair reward for that. There should be a complete change in the style of governance — the president, governors, prime minister, chief ministers, ministers, parliamentarians, and high-ranking government officials should be paid ‘consolidated pay’ liable to tax like income of an ordinary citizen.

Palatial residences occupied by them should be sold or converted into income-yielding assets, and all perquisites of civil servants and public office-holders should be monetized to remove the burden off our country’s broken financial back.

The writers, lawyers and authors of many books, are Adjunct Faculty Members at Lahore University of Management Sciences (LUMS)

Courtesy: The News
http://jang.com.pk/thenews/Aug2013-weekly/nos-04-08-2013/pol1.htm#4

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