Dynamics of domestic debt growth

Published August 24, 2020
The country’s indebtedness problem is too complex and reducing the overall debt burden is not that easy. — AP/File
The country’s indebtedness problem is too complex and reducing the overall debt burden is not that easy. — AP/File

When the PTI came to powers two years ago, Pakistan was heavily indebted. Prime Minister Imran Khan had promised to reduce the debt burden and his government, in fact, made some hectic efforts to fulfil this promise.

But the country’s indebtedness problem is too complex and reducing the overall debt burden is not that easy. What the government has done during the past two tumultuous years is that it has brought a few changes in the overall debt profile. The root cause of debt building — a shallow base of revenue and less than required foreign exchange earnings — remains intact. Unless these two problems are handled more efficiently and with full force, domestic and external indebtedness will continue to give policymakers a headache.

The government’s borrowings from the central bank and commercial banks are the two main conduits of accumulating domestic debt.

Tax revenues may remain insufficient if the focus is only on taxing the already-taxed

In 2018-19 and 2019-20, government borrowing for budgetary support — a main driver of domestic debt — stood at Rs2.20 trillion and Rs2.16tr, respectively. But the change that occurred in 2019-20 was that government borrowing for budgetary support came entirely from commercial banks. That was unlike in 2018-19 when it had come entirely from the central bank.

During Zardari and Sharif eras, it had become a tradition for the government to switch from central bank borrowing to commercial bank borrowing as and when required. But switching over to commercial bank borrowing in 2019-20 was different. It happened as a permanent policy change demanded by the IMF under its $6.8 billion lending programme, advocated by our own central bank and owned by the government. The PTI government did this to say goodbye to one driver of domestic inflation — borrowings from the State Bank of Pakistan (SBP) — and limit itself forever to commercial bank borrowing. One should hope that the PTI continues with this policy throughout its term and future governments also adhere to it.

In the first 38 days of 2020-21, the policy continuation remained in sight: the government’s net borrowing from commercial banks stood around Rs199bn and it retired SBP’s credit worth Rs435bn.

A separate set of SBP data reveals that in less than two years of the PTI government — between July 2018 and May 2020 — overall domestic debt owned by the federal government shot up from Rs24.21tr to Rs34.49tr, an increase of 42.4 per cent.

In less than two years of the PTI government, domestic debt shot up from Rs24.21tr to Rs34.49tr, an increase of 42.4 per cent

This pace of accumulation of domestic debt by the federal government is too fast and needs to be slowed. And a slowdown in it must be emphasised also because in 2018-19, Pakistan’s GDP grew only 1.9pc. In 2019-20, it shrank 0.4pc. With this growth performance, a huge addition to the domestic debt is bound to invite criticism. And that is exactly what the PTI government is facing.

But one should also be mindful of the fact that whether it is domestic debt or external debt: as the total debt stocks grow larger and larger, in tandem grows the volume of debt servicing. That is where PTI policymakers try to take cover.

They say the domestic debt grew fast because they had inherited huge volumes of it and a large part of the debt acquired during the past two years went for debt servicing. But this argument can be accepted only if they want to keep future governments in the same vicious cycle of borrow-more-to-retire-old-debts. Besides, since they don’t have decent GDP growth numbers to show, their argument becomes weaker. After all, saner policymaking does not allow a government to pile up the domestic debt just to service the old debt. Part of it has to be used — and was actually used during the Sharif era — to spur economic growth.

The PTI government has succeeded in boosting tax revenue to some extent, but it has still not been able to expand the tax base to the level where a consistent growth in revenue could be guaranteed that can minimise the government’s requirement to amass the domestic debt. When the economy grows slower than before — as it did in 2018-19 (1.9pc growth against 5.5pc in 2017-18) or when the economy shrinks as it did in 2019-20 for the first time in 68 years — even most sincere efforts to generate more revenue can fall apart. To generate larger tax revenue, the economy has to grow faster.

Equally important is the fact — and the nation has witnessed this in the past — that regardless of a decent growth rate, tax revenues may remain insufficient to meet the economy’s requirement if the focus is only on taxing the already-taxed. Expanding the tax base continually and taxing the old and new taxpayers honestly and fully are the keys to boosting tax revenues.

That is the area where failures can be traced not only in policymaking but also in the very nature of Pakistan’s statehood, its society at large and its political parties and powerful establishment. Tax collection stood a shade below Rs4tr in the last fiscal year, notwithstanding the initial tall claims of the PTI to collect more than Rs5tr. Now the government is relying on tax amnesty scheme to bring wealthier but hitherto untaxed segments of the population into the tax net to enhance revenue.

In the first month of this fiscal year, tax collection grew 15pc year-on-year and if the full-year collection target of Rs4.96tr is achieved by June, there is the possibility of a smaller-than-before addition in the domestic debt. A fuller achievement of the tax target and an inevitable reduction in domestic debt servicing owing to a recent cut in interest rates should eventually help achieve this objective.

Published in Dawn, The Business and Finance Weekly, August 24th, 2020

Opinion

Digital finance
17 Jan 2021

Digital finance

Raast offers opportunities for inclusion, but is not without risk.
Broadsheetgate
Updated 17 Jan 2021

Broadsheetgate

The competence that has underlined NAB and its actions has cost us dearly now and even in 2008.
Debate on ordinances
17 Jan 2021

Debate on ordinances

The government’s line of thinking indicates a belief in the principle of brute majority.
America in decline?
Updated 16 Jan 2021

America in decline?

In spite of the ‘gates’ that rocked the US, democracy stood firm.

Editorial

Updated 17 Jan 2021

Foreign funding case

THE Election Commission of Pakistan has summoned both the PML-N and PPP on Monday in connection with the foreign...
17 Jan 2021

Vaccine procurement

ALL eyes are on the government as it pledges to roll out the Covid-19 vaccination programme to about 80m citizens by...
17 Jan 2021

Makli ‘renovation’

THERE are fears that the recently conducted ‘renovation’ work carried out at the Makli necropolis may rob the...
16 Jan 2021

Gas liberalisation

AFTER drawing much criticism from both consumers and the opposition over its mismanagement of the energy sector that...
16 Jan 2021

Osama Satti inquiry

THE findings of the judicial inquiry into the Jan 2 killing of 21-year-old Osama Satti in Islamabad merely confirms...
Updated 16 Jan 2021

British MP on IHK

DESPITE sustained efforts by New Delhi’s rulers to remove India-held Kashmir from the global discourse, people of...