The federal budget underwent changes after taxpayers pinpointed the anomalies therein. But the changes dealt only with rates of taxes and their recovery modes. The issue of rising public debt was not addressed.

It reflected the lack of concern of the otherwise very vocal private sector over the medium and long-term outcomes of the options being exercised for plugging the fiscal gap. Not many realise that debt servicing burden has progressively reduced the state’s ability to do what it should be doing. Yet, not many fingers were raised on the way successive regimes indulged in visionless borrowing.

Knowing the future impact of debt servicing has gained importance due to the size of the debt because, traditionally, with powerful lobbies forcing the freezing of taxes, the state’s ability to raise revenue weakened steadily, and it resorted to increased borrowing. What is worrying now is the reduced capacity of the IFIs and even those countries that may want to lend to Pakistan.

Reducing non-development expenses and increasing the economic yield of each taxpayer rupee rather than borrowing more, requires enormous public pressure. That pressure, as well as suggestions for mobilising resources for fiscal management and investment, is missing. This needs urgent focus of economic and investment experts because the levels of domestic and external public debt have risen to dangerous heights.

Nothing will work better than cutting the current expenditure that no minister seems worried about. That, unfortunately, is the routine, remorseless manifestation of our fiscal irresponsibility. The fruitless long foreign trips by ministers, their exuberance and kinks in the taxation system, such as the one unearthed by the Justice (Retd) Bhagwandas Inquiry Commission, must stop.

The original FY10 fiscal deficit was Rs722bn. After reduction in several budgeted tax levies, this figure will rise, and domestic borrowing could exceed the estimated Rs458bn. However, unlike FY09, in FY10 private sector borrowing growth may not be negative which (besides banks’ increased risk-aversion) was a factor that allowed the government to borrow excessively.

As of now, the domestic debt is Rs3.72 trillion. With likely borrowing of Rs500bn (or more, instead of the budgeted Rs458bn) and repayment of Rs300bn (or less), the year-end FY10 amount could exceed Rs3.92tr provided domestic savings rose by at least 5.5 per cent over their FY09 level; given the fact that in FY09 bank deposit growth was negative, only a concerted resource mobilisation effort could materialise it.

Even if that happens, this level of public debt would leave nothing for the private sector. What will the as-of-now unconcerned private sector do then? Survive without credit, increase equities, or cut the level of its operations?

The National Savings Scheme (NSS) needs another shake-up to do more by linking up with the vast post office network to extend its mobilisation reach for non-bank savings and bring them within the system.

Retiring external debt appears doubtful given the expected drop in exports and inward remittances. After borrowing the remaining $4bn of the current IMF facility and repaying nearly $3.6bn during FY10, external debt would end up at its current level. Even if you assume that rupee-dollar parity will hover around Rs81/$ till the end of FY10, in equivalent rupees external debt would be Rs4.09tr.

The total debt would then become Rs8.01tr or even Rs8.334tr if Pakistan borrows another $4bn till the aid promised by FoDP is received – a possibility expressed by the adviser on finance while hinting at a fresh $4bn IMF standby facility. This could jack-up the external debt to $55.5bn, and inflate the debt servicing charge.

Even if despite all the slowdown prophecies, the GDP rises by 3.3 per cent during FY10, the level of public debt would take the debt-to-GDP ratio at 59 per cent. Although below the FY08 level (60.02 per cent) in volume, it could become substantially higher if the rupee depreciates further; if the GDP fails to grow as hoped, the ratio could surpass its FY09 level.

According to IMF, by 2010, debt-to-GDP ratio of the 10 richest G-20 states will cross 106 per cent as over $9tr were added to public debt since 2007. These developed states are headed for high debt-to-GDP ratios because they are pumping state funds into their too-big-to-fail banks and corporations. Years of stagnation (after its property bubble burst) have tripled Japan’s ratio from 65 per cent in 1990, to 170 per cent at present.

But, with the exception of the US and Britain, these countries have huge exchange reserves as back-up. We have no such luxury. Hence, the worries about Pakistan’s public debt that may crowd out private investment, and blunt economic growth. Worse still, falling debt servicing capacity might ultimately force default, or debt servicing burden may be met by printing more money, which will push up inflation and further weaken the rupee.

Possibility of default – the most damaging – is certainly not zero. Although, since 1940s, no developed economy has defaulted on its external debt repayment commitments, even they may do so now. Rising yields on US bonds signal concerns even about America’s fiscal future, and one stark similarity that we have with America is our huge external debt.

Debt is sustainable if the state pays interest thereon without borrowing more, which isn’t possible without economic growth and higher tax revenue to bolster the debt servicing capacity. Growth, in turn, depends on exchange rate stability, low interest rates and reliable performance by the key components of the country’s physical infrastructure. How many of these ingredients meet such expectations?

To bolster resource mobilisation, cutting consumption through taxation won’t help as much as would making saving more attractive. An option (that won’t push up interest rates) is to exempt profit on saving from all taxes supplemented by attractive incentives on inward remittances. Those offered by the SBP thus far need a revamp because they must deliver more. It calls for banks and SBP to join hands in devising them.

The other hitherto ignored but crucially important option is to revive import-substitution industries to cut imports and outflows to payment only for imported inputs. This requires a focused effort to avoid wasteful spill over of fiscal benefits into non-deserving sectors. The effort could substantially reduce the trade and current account deficits, and rebuild exchange reserves.

Finally, we must privatise state assets that logically belong in the private sector. Not privatising public services like railways is prudent, but why not privatise the others? The budgeted Rs19bn is far too less from this source. Finally, a lot is achievable in terms of resource inflow if we actively seek foreign investment in the agriculture and food processing sectors but, very oddly, privatisation and foreign investment in agriculture appear low priorities for policymakers.