CLIMBING THE PUBLIC DEBT LADDERBy: Afshan Subohi
The federal and provincial governments are expected to throw caution to the wind in 2017 and spend liberally on development schemes.
This is to score points for performance before they return to voters in 2018.
Will this new wave of public spending translate into higher growth? It could marginally.
Will it increase inflation? Yes.
Will that lead to an interest rate increase? Yes.
Will expensive credit depress private investment? No.
The investment rate is too low, and, if there will be any movement, it will be northward.
The way cheap credit failed to excite Pakistani investors, costly credit may fail to dissuade them.
Too much government expenditure in the country certainly entails a risk of destabilising the external sector.
The financial lag means public debt is expected to increase exponentially over the current year.
Both the federal and provincial governments are expected to borrow from all possible avenues (from banks, the SBP and the market) to feed their ambition.
The country might actually be forced to knock on the IMF’s door before the close of the year since the prospect of improvement in export earnings and remittances is grim.
The pace of growth in remittances lost steam in 2016 and could further slow-down in 2017 because of a shrinkage in Middle Eastern oil economies, from where much of the inward flows originate.
To give an impression of efficient fiscal management the government may be tempted to change not only the rules of the game but also the field.
It may be inclined to extend the legal boundary of government borrowing by further amending the Fiscal Responsibility and Debt Limitation Act 2005 to avoid the danger of busting the permissible borrowing limits.
Through the Finance Act 2016 the Nawaz Sharif government has already diluted the said law and extended the statutory deadline to bring the debt to 60pc of the GDP from 2013 to 2018.
It also redefined ‘total public debt’ as the ‘debt of the government obligated to be serviced out of the consolidated funds and debt owed to the IMF’.
The new definition excludes private sector external debt and intercompany external debt from the principal abroad.
This might be justifiable but excluding external liabilities, (that include central bank deposits, SWAPS, allocation of SDR and non-resident LCY deposits with the central bank, PSEs external debt, PSEs domestic debt and commodity operations including borrowings from banks by provincial governments and PSEs), is hard to defend.
It would be unrealistic to expect a stunning performance from the FBR or drastic tax yielding changes in the tax regime in the year ahead.
The scenario is gloomier on the external front. The current global wave of protectionism could further erode the scope of exports, worsening the country’s already alarming balance of trade position.
The arduously built foreign exchange reserves will be under pressure because of debt servicing and payments for persistently rising imports.
An uptick in world oil prices or further slowdown in remittance inflow can exert pressure on foreign exchange reserves.
Even if one rules out negative surprises the trend is leading towards a bigger balance of trade deficit.
In the absence of promised inflows from donors and friendly nations, pressure on reserves will upset the balance in the currency market and exchange rates.
The return to the IMF, therefore, will be a probable outcome.
Economists, such as former finance minister, Dr Hafiz Pasha, former special secretary on finance and DG Debt office, Dr Ashfaq Hasan Khan and PPP Senator, Salim Mandwiwala, projected Pakistan’s total debt to be in the vicinity of $110bn if liabilities related to the CPEC are properly booked in the debt accounting exercise.
Recently in Lahore, Dr Khan said that the government applied a lot of creative accounting to keep the books in order and veil its fiscal mismanagement.
"It is absolutely necessary to present the reality honestly if there is a will to improve the quality of management and shuffle priorities to match economic needs," he said in an informal chat, commenting on the behaviour of the current set of economic managers.
Supporters of the democratic government find anxiety over public debt misplaced.
They argue that if the government succeeds in using the acquired funds efficiently for capital formation, the benefits could outweigh the cost of the undertaking.
Officials of the Public Debt Management cell dismissed the perception of fiscal irresponsibility as baseless.
"The criticism is politically motivated. Do you really think the IMF can be dodged? For the last three years the economy was closely monitored by the IMF that assessed the performance of the government to be broadly satisfactory.
"They did warn of external sector risks, but the campaign from certain quarters to cast doubt on the credibility of official data is a dangerous game," a senior officer reacted.
According to a senior source in the Debt cell, under the PML-N government the external debt increased by 6.25pc per annum and the annual rate of increase in domestic debt was 11.5pc.
He said the total debt increased from $48.1bn in June 2013 to $57bn in June 2016, showing an increase of $9.6bn in three years.
He further stated that opponents of the government are deliberately creating a negative perception by confusing the total debt figure of the country that also includes borrowing by the private sector, provincial governments and public sector enterprises.
"There is a difference between the debt liability of the state and a government," he said.
Responding to request for a comment on the issue Dr Waqar Masood federal finance secretary articulated the government’s view in detail. He argued that the current government has reduced and not increased the debt liabilities.
Click on the tab to the right to read Dr Masood's response.
Published in Dawn, Business & Finance weekly, January 2nd, 2017
THE GOVERNMENT'S POSITION ON PUBLIC DEBTBy: Dr Waqar Masood
Responding to a request for a comment on the issue of public debt the federal finance secretary articulated the government’s view in detail. His response is as follows:
Public debt burden
Debt burden is only understood in comparison to its relation with GDP.
An analysis of the public debt to GDP ratio during the last 15 years reveals that in the period of high inflation, the ratio performed relatively better as the denominator became larger.
This ratio mostly hovered close to 60pc even when real GDP growth was merely half a per cent.
For instance during the tenure of the previous government (2009-2013), average inflation remained around 12pc while real GDP was merely 2.8pc.
Whereas, during the tenure of the present government, average inflation remained around 5pc while real GDP was over 4pc.
While the higher inflation could help reduce the public debt-to-GDP ratio, it has other adverse repercussions for the economy.
Therefore, economic managers will always prefer high real GDP growth coupled with low inflation rather than low real GDP growth coupled with high inflation.
Another way to gauge the increase in public debt burden of the country is to compare it with relevant global public debt statistics.
Pakistan’s net public debt to GDP ratio increased marginally by 1.1pc during the last three years as compared with a 6.8pc increase witnessed in the global debt to GDP ratio (IMF World Economic Outlook, October 2016).
Misconception regarding external debt
A few analysts quote the level of public external debt in media as $73bn.
They lump together public debt with private debt, which includes foreign exchange borrowings of banks as well as non-financial private firms.
The stock of public external debt as at end June 2016 actually stood at $57.7bn, up from $48.1bn as at end June 2013.
This represents a cumulative annual growth rate of only 6.3pc per annum which certainly cannot be termed as an exponential growth, as claimed by some.
It may also be noted that a part of this increase has come from the IMF debt, which has been taken only for balance of payment support and not for budgetary funding.
Further, if a correct comparison is made between total external debt and liabilities at end June 2013 as $60.9bn and a corresponding number at end June 2016 as $73bn, the actual increase was $12.1bn out of which $9.6bn was recorded in external public debt and the remaining increase was recorded in the non-public sector, which are not the government’s obligation.
Another misconception is that the present government increased total debt by Rs8,000bn to reach Rs22,000bn.
It is being calculated as follows: ie for end June 2013, only public debt numbers are compared with both total public debt as well as liabilities for end June 2016 to arrive at a misleading increase.
If a correct comparison is made between net public debt at end June 2013 as Rs14,290bn and a corresponding number at end June 2016 as Rs19,219bn, the actual increase was Rs4,928bn.
Even if total debt and liabilities are to be compared, the increase was around Rs6,100bn, inclusive of liabilities that are not a government obligation. This is summarised in table 3.
It is important to note that during the last three years (2013-14 to 2015-16) the external public debt has gone up by $9.6bn while the FX reserves of the SBP have increased by $12.1bn in the same period (or by US$ 15.3bn when compared from February 2014 to June 2016).
Further, the present government has repaid around $12bn of external debt till end June 2016, which was mainly related to the previous government borrowing.
Despite these heavy repayments, the FX reserves of the country have risen to more than $23bn, of which the SBP reserves were $18.1bn at end June 2016, — equal to over five months of import-cover as compared to less than around 3 weeks of import-cover in February 2014 when the SBP reserves stood at $2.8bn.
A realistic approach to measure the external indebtedness of the country is to take the difference between external public debt and official FX reserves of the country.
As at end June 2013, the SBP FX reserves were around $6bn against which external public debt stood at $48.1bn, thus net external indebtedness was $42.1bn ($48.1 - $6.0). As at end June 2016 net external indebtedness was $39.60bn ($57.7 - $18.1).
Therefore, net external indebtedness of the country improved by $2.50bn compared with end June 2013.
A critical consideration in debt management is the sustainability analysis for which various indicators have been designed. Major debt sustainability indicators have improved in the last three years, a fact that is acknowledged by global stakeholders.
‘Refinancing risk of the Domestic Debt Portfolio’ was reduced through lengthening of the maturity profile at the end of June 2016. Percentage of domestic debt maturing in one year was reduced to 51.9pc compared with 64.2pc at the end of June 2013.
‘Exposure to Interest Rate Risk’ was also reduced, as the percentage of debt re-fixing in one year decreased to 44.4pc at the end of June 2016 compared to 52.4pc at the end of June 2013.
‘Share of External Loans Maturing within One Year’ is equal to around 31.9pc of official liquid reserves at the end of June 2016 as compared with around 68.5pc at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
The above evidence is sufficient to establish that the government has been able to reduce public debt vulnerabilities during the last three years.
—The writer is the federal finance secretary.
Published in Dawn, Business & Finance weekly, January 2nd, 2017