Reckless borrowing

Notwithstanding the looming debt sustainably problem, the borrowing spree of the PML-N government continues, ignoring its short term and long term grave repercussions on the economy. It has planned to borrow a record breaking amount of $ 13 billion in the next fiscal year alone which is higher than the loans acquired in the outgoing fiscal year. These borrowings are sought for repayment of previously obtained loans and stabalise nose-diving foreign currency reserves.

Provisional estimates of foreign assistance component of the next year federal budget have been prepared which the government wants to unveil on April, 27. It will be the highest borrowing in a single year in Pakistan’s 71 years history. In fiscal year 2016-17, it borrowed $ 10.5 billion. However, it has not yet been confirmed whether the government will present a realistic plan of Foreign Economic Assistance on the eve of presentation of budget, or like the previous five occasions it will deliberately conceal the actual figures of its foreign borrowing plan inline with the fudging trickery of Finance Minister on long leave, Ishaq Dar. During the last five years, the PML-N government took over $ 45 billion in foreign loans, throwing the country into deep debt.

The plan does not include the intended fund facility from the International Monetary Fund (IMF). The government has relied heavily on acquiring expensive loans after the expiry of IMF Extended Fund Facility in September 2016 to remain afloat. But at the same time it has denied to seek another bail out package from this international lending agency. Recourse to extensive foreign loans at abnormally high rate of interest was taken because the government failed to create non-debt inflow of foreign capital in the form of direct investment. But the Federal Minister for Interior and Planning and Development Ahsan Iqbal always claimed to have converted the country into investment heaven and flood of foreign direct investment (FDI) has deluged the national capital market.

Despite repeated denials of not going for another IMF bail out package, Advisor to the Prime Minister on Finance and Economic Affairs Miftah Ismail is reaching Washington presumably in a hectic pursuit of concessionary loans from the global lending agencies. The visit comes a few days before the last budget of the incumbent government. It has fuelled speculations that Pakistan may seek some last minute reprieve from international donors and the US government. It remains to be seen that when the government approach the IMF for a fresh fund facility.

Latest data from the State Bank of Pakistan (SBP) reveals that the country’s total debt liabilities have risen by 14 percent in the second quarter of the current financial year relative to the same period last year. This shows that debt to GDP ratio has gone up to 71.7 percent which is much higher than the maxim limit of 60 percent of the GDP to debt level as prescribed by the Fiscal Responsibility and Debt Limitation Act, 2005. The World Bank pegged an assistance of $ 400 million subject to the condition that the government would make more tough legislation than the existing one for debt limitation and its management but the incentive could not be availed by the government which is fond of piling up domestic and foreign debt for non productive activities.

Borrowing for heavy investment to enhance the productive capacity of economy and break the low growth trap is a prudent mode of financing. It is the lavish spending of borrowed money on non productive mega projects and extravagance in current expenditure that creates the sustainability issue. By itself debt is not a problem. What matters is the paying capacity of the economy. The problem for Pakistan is low tax revenue, which will further go down after the implementation of Tax Amnesty Scheme, falling exports and home remittances and extremely low level of foreign direct investment. These factors make it difficult to carry smaller amount of national debt.


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