An imminent ‘debt trap’
Former finance minister Ishaq Dar, who was rightly accused of mismanaging the economy, had found an easy way to resolving serious economic issues by borrowing from all sides which eventually resulted in the accumulation of unprecedented debt. This is in that backdrop that independent economists believe Pakistan is facing an imminent ‘debt trap’ and that bad time is ahead due to the inaction of the current government. As a matter of fact, the PML-N miserably failed to meet its election promise of permanently eliminating circular debt, which has piled up to Rs400 billion. By including the stock of debt that is parked in a holding company, the total circular debt would jump to Rs800 billion. In its latest report, the Islamabad-based, independent think tank namely the Policy Research Institute of Market Economy (PRIME) has noted that the incumbent government has failed to fully implement its election manifesto on the economic front and has achieved just six of its 89 announced goals. The growing burden of debt is now becoming more than evident and the situation has worsened to a level where even a street vendor can understand the impact. Just imagine, the former finance minister Ishaq Dar had claimed that Pakistan’s economy had turned around and the country did not need another IMF bailout. However, the situation has already worsened to alarming level. From July through October of this fiscal year, the federal government has obtained $2.3 billion in foreign loans, including $1.02 billion in commercial loans. A newspaper reports says that a team of Finance Ministry and SBP officials is already in the United States to raise between $2 billion and $3 billion from the debt markets by floating sovereign bonds aimed at creating some space till the time a new programme is negotiated with the IMF. It is very unfortunate that the Pakistan PML-N promised much in its election manifesto but delivered little in terms of economic performance. The gap between what was said and what was done has pushed the country into a deep debt trap, increased income inequality, and an increasing number of question marks hovering over the economic outlook. The country’s official foreign currency reserves, which peaked to $19 billion, slid on the back of foreign borrowings to $13.54 billion as of November 17, barely enough to finance two-and-a-half months of imports. The federal government consumed a significant amount of foreign currency reserves to manage the rupee-dollar exchange rate parity while turning down proposals to let the currency devalue to its ‘real value’ of around Rs118 to a dollar. The current parity is Rs105.4 per dollar. The biggest criticism against the incumbent government, however, is the massive increase in external debt and liabilities, which have increased to $83 billion as of June 2017. In June 2013, a few weeks after the PML-N government came into power, external debt and liabilities stood at $61 billion. Right now the foreign investors are concerned by macroeconomic indicators, and the possibility of Pakistan needing another bailout is much more real than ever before. Barring progress on the pace of inflation and increasing national output, which grew from 3.7 per cent to 5.3 per cent in four years, the government’s performance remained questionable on all economic fronts. Even the annual economic growth of 5.3 per cent in the fiscal year 2016-17 was the result of growth in the services sector, which is not labour intensive. In its election manifesto, the government had promised to increase the economic growth rate to 6 per cent by the end of the fourth year, and 7 per cent by June 2018. According to a report from the International Food Policy Research Institute, Pakistan remains near the bottom of the Global Hunger Index, standing at 106 among 119 developing countries ranked. Since the government has not been able to enhance exports and attract significant foreign direct investment, the external sector has remained under pressure. Exports, which stood at $24.5 billion in June 2013, have decreased to $20.42 billion as of June 2017, according to the SBP annual report. The extremely poor position of the fiscal and external fronts belies the official claims of turning around the economy. Instead, the worsening situation forced the chief of army staff to give a wakeup call to the government. The army chief warned the authorities about the “sky-high debt” and “abysmally low tax base”. The government also failed to meet its promise of rationalising sales tax by ensuring standard rates for all items. In fact, a recent World Bank report suggests that Pakistan is losing Rs3.2 trillion in revenue every year due to weak tax compliance and enforcement. The government failed to show notable progress on the two most critical macroeconomic areas – investment and national savings. The investment-to-GDP ratio inched up from 15 per cent in June 2013 to 15.8 per cent four years later. It was well below the government’s targets, and Dar would conveniently fail to bring it up. The PML-N always boasts of promoting private investment in the country – a claim far from reality. In June 2013, private sector investment was 9.8 per cent of GDP. At the end of June 2017, it stood at 9.9 per cent, according to the SBP report. In the energy sector, the government was unable to reform Nepra. Likewise, reforms could not be introduced in power distribution and generation companies. These entities kept causing heavy losses, which the government tried to cover by charging various surcharges from consumers.