Tag Archives: devaluation

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”.

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Pakistan has had so many “moments of reckoning” but here is another – By Najam Sethi

Matters are coming to a head in Pakistan. The deadlock in US-Pak relations over resumption of NATO supplies is veering towards confrontation. And the confrontation between parliament-government and supreme court-opposition is edging towards a clash. The net losers are fated to be Pakistan’s fledgling democracy and stumbling economy.

Pakistan’s Parliamentary Committee for National Security has failed to forge a consensus on terms and conditions for dealing with America. The PMLN-JUI opposition is in no mood to allow the Zardari government any significant space for negotiation. COAS General Ashfaq Kayani is also reluctant to weigh in unambiguously with his stance. As such, no one wants to take responsibility for any new dishonourable “deal” with the US in an election year overflowing with angry anti-Americanism. The danger is that in any lengthy default mode, the US might get desperate and take unilateral action regardless of Pakistan’ s concern. That would compel Pakistan to resist, plunging the two into certain diplomatic and possible military conflict. This would hurt Pakistan more than the US because Islamabad is friendless, dependent on the West for trade and aid, and already bleeding internally from multiple cuts inflicted by terrorism, sectarianism, separatism, inflation, devaluation, unemployment, etc. Indeed, the worst-case scenario for the US is a disorderly and swift retreat from Afghanistan while the worst-case scenario for Pakistan is an agonizing implosion as a sanctioned and failing state.

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