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Borrowing spree

Prime Minister Imran Khan has repeatedly criticised the policy of reckless borrowing of the last PML-N government which ballooned the public debt to Rs. 30000 billion. But the Pakistan Tehrik-i-Insaf government has also not succeeded as yet to improve the economic management, particularly the tax collection by the sluggish Inland Revenue Services Department of the Federal Bureau of Revenue (FBR).

The State Bank of Pakistan (SBP) has reported that it had lent Rs.1.43 trillion to the government in the past six months through an easy mode of deficit financing by printing new currency notes. Hence, government borrowing from the central bank shot up five times in July-December 2018 as compared with Rs.288.1 billion in the same period last year. The massive borrowing was necessitated to meet the budgetary shortfall in the wake of additional expenditure and revenue gap. The government has set an ambitious tax collection target of Rs.4.398 trillion for FY 19 to keep its borrowing low. However, FBR has missed the first-half revenue target by Rs.170 billion.

The grim public debt scenario for the current fiscal year had been predicted by the former intelligent and articulate caretaker finance minister Dr. Shamshad Akhtar in July, while speaking at a public debt seminar. She had said that public debt had increased to unsustainable level of R.24.5 trillion or 72 percent of the size of the economy—the highest level in 15 years—due to weak economic management, linking the last political government with current economic mess. Dr. Shamshad had also cautioned that public debt would further increase to 74 percent of the Gross Domestic Product by July 2019. The safe limit of public debt for a country like Pakistan in the current situation is 60 percent of the GDP. She stressed the need for fiscal consolidation by restricting expenditure and enforcing a radical plan of domestic resource mobilization. . She advised, “Manage the debt level, Pakistan has to have a strategy to combat low domestic resource mobalisation and go after tax evaders,” The strategy had worked in President Musharraf era when the number of active tax payers had been increased to 2.4 million which dropped to 1.2 million in PML-N government. Federal Bureau of Revenue FBR does have an authentic data of 3.8 million wealthy people but the data is not being utilised to expand the tax base despite the advice of Word Bank and International Monetary Fund.

As per the straightforward assessment of Dr. Shamshad Akhtar, weak economic management was a key reason behind such a high debt level and she urged that in future a sensible economic management is needed, if the next government wants to overcome prevailing economic woes of the country. The highest in the world energy input prices decreased the comparative advantage of exports and both its quantum and value went down on a downward trajectory. The one sided Free Trade Agreement (FTA) with China of giving the concession of zero import duty on 35 percent tariff lined and Preferential Trade Agreements with Indonesia and Turkey resulted in$20 billion plus trade deficit with these countries. Ironically, Pakistani exports to these countries were subject of a number of tariff and non-tariff barriers and hence the quantum and value of our exports did not grow.

An enlightened debate continues on the growing public debt and its sustainability in the current macro economic frame work. Borrowing in itself is not a bad fiscal device. It is the mode of spending of the borrowed money that creates risks to the economy. Japan tops the list of heavily borrowing countries as its public debt stands at 253 percent of its GDP. But it borrowed heavily for heavy investment in enhancing the productive capacity of the economy to break the trap of; low economic growth. Greece ranked second in the list which borrowed 180 percent of the GDP. But it spent national debt lavishly on non productive construction activities and was compelled to mortgage national assets and even water supply and postal services with the European banks in addition to reduction in the amount of pension to pensioners and wages of employed workers.

What matters is the paying capacity of the economy for the public debt. The problem with Pakistan is low direct tax revenue, falling exports and home remittances, and extremely low level of foreign direct investment. These factors make it difficult to carry the load of even smaller level of national debt.