By. M.S. Qazi
THE GOVERNMENT is pursuing a debt retirement policy to pull the country out of debt trap by 2012. By reducing debt liability from existing 102 to 60 per cent of the GDP, it plans to bring down the debt to sustainable limit.
The crucial question is: Will fiscal and monetary policies being pursued help to achieve the stated goal? Or, mere promulgation of fiscal responsibility and debt limitation ordinance (FRDLO) will do the needful.
The debt-to-GDP ratio of the 60 per cent is permissible by international standard being pursued emphatically by the IMF, particularly with reference to developing economies like Pakistan, notwithstanding the fact debt liability of rich countries like Japan and Italy is nearly 130 per cent and 105 per cent of their respective GDPs. Worse, Japan’s debt liability is growing fast mainly because of high fiscal deficit of almost 7 per cent of GDP, a figure which matches with Pakistan’s fiscal deficit figure for the outgoing fiscal year.
Despite such a high debt-to-GDP ratio in case of Japan and the fear that Japan’s debt might grow between “4 to 7 per cent a year” bond rating agency like Moody’s is not very sure, “when might the debt (of Japan) become unsustainable”. The reason is that most of the Japanese debt is in its national currency, yen and 95 per cent of the debt is held by the Japanese who are known big savers in contrast to the Pakistan’s who are constrained to save a little because of low income.
As there are no big or small comparisons between the Japanese and Pakistani economies, the same way there are no comparisons between the debt liabilities of the two countries. Pakistan’s debt liability has certain visible and unmanageable contours. The foreign component of public debt is 58.1 per cent of the GDP i.e., $36 billion and domestic debt is 44.3 per cent Rs1674.9 billion. Debt servicing of Rs289.7 billion reflected in budget estimates for FY-03 is to consume 47.6 per cent of the current expenditure of Rs608 billion and 39 per cent of the total expenditure of Rs742 billion. It is to consume 60.1 per cent of net revenue receipts of the federal government.
The external debt of $36 billion is about 400 per cent of the foreign exchange earnings of $9 billion which is 250 per cent higher than sustainability criteria of 150 per cent of forex earnings worked out for highly indebted poor countries (HIPCs). For Pakistan, the criteria is stated to be 200 per cent. Such a huge disproportion between foreign exchange earnings and foreign debt has certain obvious consequences; the economy is totally dependent on foreign inflows like cheap IMF credit under SBA and PRGF, financial assistance of donor capitals like Washington, debt rescheduling by the Paris Club and reprofiling, of bilateral debt, enhanced remittances by expatriates and debt swaps to strengthen external account to ease intensity of debt trap.
The government has been conscious of the problems emanating from high cost of debt servicing, particularly the cost of external debt servicing because its severity and management has been more problematic than domestic debt. To set a roadmap for public debt resolution, the government had appointed a ‘debt committee’ which were to suggest a strategy of reducing debt burden that stands 600 per cent more than government’s revenue. The committee conscious of implications of foreign debt including technical and sovereign default suggested a workable “external debt. Reduction strategy (EDRS) which set five goals to be achieved till end of FY-2005. The goals are: to do away further assistance from the IMF after the conclusion of PRGF by September 2004; no further rescheduling of debt after 2004; reduction of external debt to sustainable level of 200 per cent of forex earnings by mid-2005, to build forex reserves to $5 billion by mid-2004 and finally to reduce short term debt i.e., debt with a maturity of less than one year to less than 10 per cent of total external debt obligations.
The debt committee highlighted the measures that would help in achieving these goals. They include sharp reduction in trade account through export expansion and import savings, large-scale privatization of national assets, restructuring of the Paris Club debt, quick disbursement of assistance from the IFIs and retirement of expensive commercial external debt. These measures require to generate a surplus in the non-interest current account BOP of around $1.0 billion, $3 billion through privatization, exceptional financing of $6 billion under PRGF and support from the World Bank, and the ADB. The measures also envisaged to increase exports from $8.2 billion in FY-00 to $12 billion in 2003-04.
How EDRS would have worked to ease the burden of foreign debt is merely an academic questions at present. It is because of change in international security environment. Pakistan economy’s external account has improved substantially. In fact some of the goals of EDRS have been achieved earlier than expected. For example, forex reserves have increased to more than $6.0 billion by end-June 2002. They were to increase to $5.0 billion by mid-2004. Debt reprofiling of $12.5 billion bilateral debt has ended the scope and appetite for further debt relief. Commercial expensive debt of $2 billion has been paid for. Exceptional financing upto $6 billion might be achieved in next 2-3 years given the existing ‘good relations’ between the IMF/World Bank reasons which are not apolitical. A few of the goal posts, however, seem to be unachievable for a variety of reasons. They are: end to seeking the IMF assistance after the conclusion of ongoing PRGF, foreign debt might not be reduced to sustainable level of 200 per cent of foreign earnings because export growth from FY-00 till FY-02 has been around $0.5 billion and is unlikely to increase to essential level of $14.0 billion by end of FY-05.
It is to be appreciated that strength gained in external account is not because of improvement in macro-economic indicators like reduced fiscal deficit, high economic growth, reduced trade deficit or surplus trade account that facilitate reduction of debt liability. External account has been strengthened for reasons which at best could be called fallout of pro-Washington foreign policy. Any wind of change could jeoparadise the economic gains made so for or are likely to accrue in future.
Domestic debt constitutes 44.1 percent of total debt and high rate of interest to be paid on it is Rs191.8 billion. It constitutes 66.2 per cent of total debt servicing of Rs289.7 billion for the current fiscal year and 39.8 per cent of net revenue receipt of Rs481.4 billion. This is quite a bit of amount given scarce domestic financial resources, low saving rate and higher rate of incidence of poverty. Successful containment of inflation to single digit of 3-4 per cent of prohibitively high interest rate that not only deters investment but adds to debt liability, has been addressed by the government to reduce interest rate by 4-6 percent over past five years on national saving schemes (NSS), the main source of government to cater for fiscal deficit need. The recent cut of 2.5 per cent in interest rate on NSS would reduce debt servicing liability by about Rs10 billion.
Whereas these administrative measures might add cosmetically to reduce cost of debt servicing, the real causes of high fiscal deficit that is low revenue collection compared to projected targets, high deficit of state-owned enterprises (SOEs) that is more than Rs100 billion, high non-development expenditure including defence expenditure, inability to contain ever increasing volume of non-performing loans (NPLs) of nationalised banks whose quantum has shot upto more than Rs300 billion are not being addressed. For the current fiscal year, fiscal deficit of Rs162.7 billion i.e. 4 per cent of GDP will be a real challenge to be addressed.
The government conscious of the constraints which high debt and fiscal deficit create to pull economy to low economic growth rate and to check the extravaganza of high fiscal deficit and borrowing frenzy during the 90s as a convenient mode of fiscal management has come up with draft Fiscal Responsibility and Debt Limitation Ordinance 2002 (FR & DLO-02) which when executed will restrict government to borrow “through effective debt and deficit management”. The ordinance aims at reducing fiscal deficit to zero not later than 30th June, 2007 and ensuring that total public debt does not exceed 60 per cent of GDP by the end of 2012.
Promulgation and execution of FR&DLO-2002 will be a step in right direction to address chronic issue that has made economic recovery its hostage. The strength gained because of some-what dramatic improvement in external account could be one of the reasons to promulgate the ordinance not to let the gains be spoiled through imprudent policies in future by any government. But to revamp debt retirement strategy through economic imperatives of boosting domestic economy through attracting higher investment by building investors confidence, increasing exports by at least $1.0 billion each year during next 5 years, reducing fiscal deficit to 3 per cent by June 2005, collecting tax revenue by an increased rate of 10 per cent each year and achieving privatization targets must be addressed on priority basis. In case measures to improve economic indicators through bold initiative of restructuring economy were overshadowed by political expediencies or personal choices of convenience, getting out of debt trap could become a far-fetched and sour dream. The strategy to revamp debt retirement within the framework of FR&DLO would need more imaginative hardwork that has been put in so far.