Growing appetite for foreign debt

Published September 2, 2013
— Photo by Dawn
— Photo by Dawn

AS Finance Minister Ishaq Dar digs his heels deeper into fiscal affairs, he is demonstrating an increasing appetite for foreign credit and loans.

He is now eyeing $12 billion from foreign lenders over the next three years. But he insists these loans would be utilised to repay the current external debts.

In contrast, over the past five years, foreign loans amounting to over $14.55 billion were obtained and external debts of $10.6 billion were paid back.

While the PML-N has been saying that it wants to smash the begging bowl, Dar maintains that Pakistan, as a member of the IMF, is eligible to access the Fund’s credit.

In the short span of time that the PML-N government has been in power, it may not be fair to come to any value judgment about its stated policy posture and initial actions based on existing ground realities. Yet, the direction in which the finance ministry is currently moving is no different than the one pursued vigorously by the former PPP-led government.

Commenting on Dar’s move to get the IMF loan raised from $5.3 billion to $6.6 billion or $7.2 billion, Dr Ashfaque H. Khan says “it would create complacency on our part towards building up foreign reserves”.

In an article published in an English daily, Dr Khan also points out that the PML-N government has borrowed Rs611 billion just in 40 days from the State Bank of Pakistan, against Rs507 billion for the full year 2012-13.

And Mr Nawaz Sharif’s pet mega projects cannot be implemented without foreign investment and external debt. Apparently, the PML-N government will be treading the same path as Pakistan has traditionally travelled , starting from President Ayub Khan’s debt-driven ‘development decade,’ to President Musharraf’s foreign capital-driven high economic growth, and the outgoing PPP-led government’s reckless borrowing, which, this time, delivered a sluggish growth for a variety of reasons, including historical legacy.

Dar expects $6.6 billion from the IMF, $900 million from the Islamic Development Bank, $1 billion from the Asian Development Bank, and another $1.5billion from the World Bank over a three-year period. During its full tenure of five years, the previous government had borrowed about $9.65 billion

From the international financial institutions, a little less than being targeted by the finance minister.

But borrowing from multinational lenders is one aspect of the PML-N’s policy. Mr Ashan Iqbal, the minister for planning, development and reforms, is talking of ‘self-reliance’ and ‘domestic resource mobilisation’.

The planning commission has been renamed as the ‘planning, development and reforms commission’. The focus has also shifted from ‘economic growth’ to ‘Development Strategy’ (2013-18). The prime minister will be the chairman of the commission, which would also draw support from a newly created planning and development ministry. The planning commission would thus be resurrected.

While it cannot be denied that there is some evidence that the PML-N government is committed, in some ways, to an approach different from the one adopted by the PPP-led government, it is not yet clear whether there would be a paradigm shift in policies that would take the economy towards self-reliance. After all, the concept of foreign-capital/debt-driven growth model is too deep seated in the economy to be dislodged easily. In the past, foreign debt has not been used to move towards self-reliance, and resulted in external over-dependence.

The only significant factor for import substitution is the continuing depreciation of the rupee, which makes imports of raw materials and machinery expensive for export-oriented industries.

Mr Ahsan Iqbal has listed tax, investment and exports as three priority areas for the future, but import substitution (in areas where the country has domestic advantage), which is needed for reducing foreign dependence, is not on the commission’s agenda.

Domestic resource mobilisation is generally referred these days to raising tax revenue, whose ratio to national income is at its lowest ebb. Here too nothing is being done to effectively tax the incomes of the landed aristocracy, or to effectively improve collection of direct taxes.

The PML-N government in Punjab is waiting for an appropriate time to tax farm incomes, while reliance on indirect taxes has been increased, whether it be through sales or withholding tax; the latter in essence being an indirect tax. Heavy reliance on indirect taxes is regressive; inequity in taxation lacks social sanction and results in poor tax culture.

While the planning body has been renamed to indicate the focus on ‘reforms,’ there is nothing to show that the government is serious about introducing tax reforms. In fact, the corporate tax would be cut by one per cent from next fiscal year. The outcome of the move to get tax evaders into the tax net is not clear as yet.

In the field of energy, electricity tariffs have been raised, as in the past, which will perpetuate inefficiencies and losses of utility companies — a perennial source of drain of resources. So, there is no change. The planning commission’s agenda appears to be rhetoric in the face of status quo in policies.

However, it seems probable that investment would pick up during the tenure of an industrialist prime minister, who inspires confidence in both domestic and foreign investors. But there are two pre-conditions: an end to energy shortage, and high economic growth, which offers lucrative returns to investors.

No doubt, the current year’s federal budget has raised development spending by 50 per cent, but actual disbursement of money for projects is dismally slow. Development spending opens up avenues for business for the private sector.

It needs to be conceded that planning for ‘development’ or ‘reform’ is a challenging job in the current turbulent times, which indicates an unguided informal transformation is underway and needs to be expedited with centralised guidance.. To move with the times, conventional wisdom will not work, and out of the box thinking is required.

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