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Govt admits violating Debt Act

February 02, 2012

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The ministry of finance said the total public debt that stood at Rs6.04 trillion in June 2008 surged to Rs10.996 trillion by end of first quarter of the current fiscal year. – File Photo

ISLAMABAD: With Pakistan’s total public debt increasing by 82 per cent to Rs10.996 trillion since 2008, the government on Wednesday conceded major violations, for the fourth consecutive year, of the Fiscal Responsibility and Debt Limited Act 2005 that sought to limit expenditures and debt build up.

In its debt policy and fiscal policy statement, the ministry of finance said the total public debt that stood at Rs6.04 trillion in June 2008 surged to Rs10.996 trillion by end of first quarter of the current fiscal year, showing an increase of 82 per cent.

It said the law required the government to reduce the revenue deficit to ‘nil’ not later than June 2008 and thereafter maintaining a revenue surplus. This clause of the law continued to be violated as at end of June 30, 2011, the revenue deficit approximated to Rs595 billion or 3.3 per cent of GDP.

The finance ministry said the government was required under the law to reduce total public debt by no less than two and a half per cent of GDP every year. This condition was also missed as during 2010-11, the debt-to-GDP ratio was reduced by only 0.8 per cent.

On top of that the government was required not to issue new guarantees including those for rupee re-lending, bonds, rates of return, output purchase agreement. “New guarantees issued by the government in 2010-11 amounted to Rs62.4 billion or 0.35 per cent of GDP. The government also issued letter of comfort equivalent to 0.5 per cent of GDP against commodity operations”.

However, it qualified the slippage saying serious internal security situation, energy shortages, severe floods and rising inflation combined with global economic and credit crises and higher commodity prices have all put enormous pressure on government’s limited fiscal resources.

“Given the severity of these constraints, the government has been able to manage the fiscal deficits at reasonable levels though was unable to fully comply with some provisions” of the said act.

Also, the debt-to-GDP ratio that was scaled down from 79 per cent in 2001-02 to 55.4 per cent by end of 2007 once again increased to 59.3 per cent of GDP as of June 30, 2011. It, however, said the limit of containing public debt to GDP below 60 per cent would become applicable from fiscal 2012-13 onwards.

The government also admitted that it borrowed Rs527 billion in long-term against a target of Rs408 billion during the year while short tenure borrowing also surged to Rs569 billion against the target of Rs91 billion, due to higher security expenditure, energy and food subsidies and non-materialisation of defence and privatisation proceeds and lower revenue collections.

The ministry said one way to augment domestic resource envelop was to reduce currency to deposit ration that standing at around 30 per cent was highest in the region.

The ministry attributed most of the slippages to fiscal policy becoming “subservient to political exigencies as government extended wholesale subsidies on oil, electricity, food and fertiliser to protect more vulnerable sections of society”.

It added “higher security related expenditure supported by policy inaction on key expenditures plus expenditure due to natural disasters led to rapid escalation of total public debt as percentage of GDP, reaching 60 per cent by end 2010”.

The finance ministry said the total public debt at Rs10.709 trillion as of end June 2011, the domestic currency debt jumped by 84 per cent to Rs6.015 trillion while foreign currency debt increased by 69 per cent to Rs4.69 trillion.

It, however, warned that public debt-to-GDP ratio may be understated as it did not include any estimates of contingent liabilities, which might materialise in future.

“Unfortunately, the government has not installed any system to quantify and manage the fiscal impact of these contingent liabilities, rather these liabilities are created essentially on an ad hoc basis and without regard to fiscal consequences”, the statement said.

It said the total public debt increased by 20 per cent or Rs1.788 trillion including Rs62 billion from external sources during 2010-11 alone to finance government’s fiscal operation.

Approximately, $3.3 billion were added to the external debt stock owing to depreciation of US dollar against other major international currencies and around Rs27 billion were added by depreciation of the rupee against dollar by 0.6 per cent.

The country’s external debt and liabilities (EDL) stock was recorded at $60.1 billion as of June 30, 2011. During 2010-11, $4.5 billion was added to the stock resulting in a growth of 8.1 per cent.

On a positive note though, the finance ministry said soundness of Pakistan’s debt position while deteriorating slightly in previous fiscal year remained higher than the internationally accepted thresholds.

Total public debt levels around 3.5 times and debt servicing below 30 per cent of government revenue are generally believed to be within the bounds of sustainability.

Total public debt in terms of revenues has increased to 4.7 times during 2010-11 as opposed to 4.3 times in the previous fiscal year whereas the debt serving to revenue has declined to 37.7 per cent in 2011 from 40.4 per cent in 2009-10.

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