Pakistan's total debt stock (domestic and external) is rising dramatically and posted a rise of 1.234 trillion rupees in the first eight months of the current fiscal year. The extent and the reasons behind the rise in debt stock identified by the Economic Survey 2010-11 for the first nine months of last year are equally applicable for the current fiscal year: "the primary source of increase in public debt during July-March 2011 has been a sharp rise in the local currency component that accounted for 69.7 percent of the total increase in total public debt.
This was primarily due to the slower disbursement from multilaterals and bilateral donors and higher than budgeted fiscal deficit...the structure of the public debt has experienced subtle changes since 2001-02." Thus the focus has shifted more towards domestic borrowing which inched up its share from 48.9 percent in 2001-02 to 52.9 percent in 2008 to 54.5 percent at end-March 2010-11.
A few conclusions can easily be drawn from these statistics. First, foreign inflows have been much lower than pledged since 2009 when the Friends of Democratic Pakistan met in Tokyo and pledged a little more than 6 billion dollar assistance to Pakistan - an amount that has not exceeded more than a billion dollars at best to date.
The suspension of the Stand-By Arrangement with the International Monetary Fund with two tranches undisbursed and the refusal of the Fund to extend a Letter of Comfort that would have enabled other multilaterals as well as bilaterals to convince their stakeholders that Pakistan remains engaged on a reform path and therefore it is economically feasible to extend budgetary support led to further slowing of foreign disbursements.
Second, the government has been unable to keep within its budgeted current expenditure and the main reason is not any significant increase in defence expenditures (last year the budgeted outlay on defence exceeded actual allocation by 2.5 billion rupees only) but a massive rise of 267 billion rupees in outlay on general public services than what was budgeted.
Out of this total 32 billion rupees higher than budgeted was accounted for by a rise in domestic debt servicing and a whopping 211 billion rupees in subsidies to Wapda/Pepco (mainly to eliminate inter-disco tariff differential that supports the poor performers) and 44 billion rupees more to KESC than budgeted.
This enhancement in current expenditure necessitated a massive slash in development expenditure of about 94 billion rupees with a consequent impact on Gross Domestic Product growth as well as inflation and unemployment. However the decline in PSDP was not sufficient to contain the deficit to the budgeted level of 4 percent last year and the actual deficit was a little over 6 percent of the GDP. Third the government failed to increase tax collections by ending existing anomalies and thereby making the tax system more palatable to the payers by dint of being transformed into a more equitable one.
Thus the total tax revenue collected failed to meet the budgeted target by 99 billion rupees last year - a trend that sceptics maintain would continue in spite of periodic statements that this year the government would meet its tax collection target of 2 trillion rupees. And finally the cost of borrowing for the government is rising due to sustained poor performance of our key macroeconomic indicators inclusive of rising domestic debt.
The solutions are fairly standard normal for all countries and include (i) making an effort to increase revenue collections while keeping expenditure, specifically current expenditure within the budgeted limit; (ii) development expenditure must be focused on the energy sector to ensure that productivity no longer remains susceptible to energy shortfalls and not subjected to massive slash at the end of the year; and (iii) interest rate and inflation must as per the Economic Survey 2010-11 'remain benign'.
Disturbingly these prescriptions are available to the government however it continues to allow politics to dictate its economic priorities.
