Re: PPP’s good governance
There’s no performance what so ever and the next couple of years will be really tough as we will have to start repaying some of the debt that we have accumulated, and how would that be achieved while the energy crisis is there, no solution to the on going wars in KP and Balochistan, poor law and order in karachi. Some very drastic steps will be needed to steer the country now in the right direction, and I am really afraid that the country may not be able to sustain another “awami” government in the next elections.
Is the government in a debt trap? - Dr Muhammad Yaqub
**One of the most worrying aspects of economic mismanagement is sharply deteriorating public finances. However, the government does not seem to realise the gravity of the situation and continues to finance the large public sector deficit by internal and external borrowing, increasing the government debt at an alarming speed.
The government debt rose at an annual rate of 26 percent in the last three years from Rs6, 216 billion at the end of FY08 to Rs10, 996 billion at the end of FY11, and further to Rs11, 826 billion at the end of November, 2011.Thus, the present government borrowed up to November 2011 as much as 90 percent of the outstanding borrowing of all the previous governments.** At the end of November 2011, every Pakistani was burdened with government debt of Rs65, 700.
During the July 1, 2011-January 20, 2012 period of the current fiscal year, the net government sector borrowing from the banking system alone amounted to Rs737.4 billion compared with Rs287.8 billion in the same period last year and Rs579.6 billion in the entire FY11. At this rate, the government borrowed Rs.3.7 billion every day from the banking system during the current fiscal year so far. Even after taking into account the retirement of debt by the public sector enterprises of Rs275.3 billion to the banking system, due to its take-over by the government, net government borrowing amounted to Rs2.3 billion per day up to January 13, 2012. This trend is likely to accentuate in the remainder of the current fiscal year.
One shudders to anticipate the reality that will be hidden behind the web of statistical trickery of the budget documents and language verbosity of the finance minister in his budget speech, while presenting the fifth and last budget of this government in May, 2012. The effort will be to camouflage the facts, dodge difficult economic policy decisions and at the same time avoid a crisis on their watch by more borrowing, but it will involve a high long term national cost.
Not being able to control expenditure, and unwilling to collect taxes from the rich and powerful, the government has adopted the politically easy course of taxing the poor through borrowing and inflation. It is an economically disastrous course of action.
The government that is borrowing from the banking system at this rate is not only adding to intense inflationary pressures, keeping the interest rates high, crowding out the private sector, mortgaging the economic future of the next generation but also getting itself into a domestic debt trap; a situation in which it will get in a spiral of ever-increasing bank borrowing to service and repay the previous debt.
Normally, sustainability of debt by a country is determined in relation to its nominal GDP. In the case of Pakistan, the sustainability of domestic public debt basically depends on growth in tax revenue and, in the case of foreign public debt, on the growth in exports in addition to that in tax revenue. Both have lagged considerably behind the growth in nominal GDP and in the expenditure on debt repayments and debt servicing.
The rise in nominal GDP in the past three years represents basically a high rate of inflation as the real output growth rate was very low. Tax revenue is very inelastic in relation to prices largely because several indirect taxes are specific rather than ad valorem. Moreover, a large segment of the economy is out of the tax net and tax loopholes are rampant even in the taxed sectors, tax payment culture is non-existent, tax administration is very corrupt and the economy is lacking documentation. Additionally, the services sector, which has grown fast, has not been properly taxed. As a result of all these factors, tax revenue has risen at a slower pace than debt repayment and servicing, which have been eating away a rising share of tax revenue.
About forty-two percent of the government debt is in foreign exchange. As mentioned earlier, its serviceability depends, in addition to rupee revenue resources, on the availability of foreign exchange. Sustained availability of foreign exchange, in turn, depends basically on export growth. Pakistan did not adopt a strategy of export-led growth and, therefore, the rate of growth of exports has been very sluggish. As a consequence, a large current account deficit each year has added to external government debt and foreign debt servicing liabilities.
The government should realise that its national responsibility to stop budget mismanagement and accumulation of debt before it is too late. Moreover, the external sources of borrowing are already drying up and at some point commercial banks will also become reluctant to continue to add more government debt in their asset portfolio.
As a consequence, and in the absence of a major tax effort, the government would be left only with the option of borrowing from the central bank, which means printing of currency notes. The injection of high-powered money in the system will lead to hyperinflation that will shake public trust in the national currency leading to a crisis in the financial system.
Even if the government realises the gravity of the domestic debt situation and takes bold tax measures to increase the tax-GDP ratio and avoid hyperinflation, the country will still be threatened by external debt default if the current account deficit of the balance of payments is not reduced through export expansion.
The export growth is not possible without a sharp increase in domestic output and in domestic rate of saving, stability in production activity, security for shipment of goods to the world markets, opening up of the world markets for Pakistani goods, and a comparative competitiveness of prices at a given exchange rate, or depreciation of the exchange rate at a given non-competitive cost structure.
Obviously, export expansion will materialise only if, in addition to good governance, uninterrupted supply of gas and electricity to agriculture and industry and peace and security, the government creates a suitable macroeconomic policy framework for export competitiveness.
**There is no hope that the present government will undertake major policy reforms in the midst of an election season. In all likelihood it will let the foreign exchange reserves fall to a critically low level taking the country towards external debt default. Alternatively, the government may engage in expensive short-term borrowing from the world markets through issuance of bonds, or sell national assets to foreigners to earn some foreign exchange. Such adventures will only make the economic management problems of the next government more difficult.
**
The government’s negligence is driving the country to a situation in which the only option to avoid external debt default will be to have a financial arrangement with the IMF. But IMF assistance will come at a very high cost in the form of painful policy reforms mostly as a prior condition in view of the poor track record of the government in meeting the policy commitments in the past. As a result, the sufferings of the people will multiply and sovereignty and security of the country will stand compromised.
**It may be pointed out that in the matter of government bank borrowing, currently the State Bank of Pakistan is not fulfilling its statutory responsibility under Section 9A and 9B of the State Bank Act by allowing the government limitless access, and the ministry of finance is in violation of several provisions of the Fiscal Responsibility and Debt Limitation Act of 2005. In a law abiding country, such violations by the executive branch of the government would get challenged in the legislature and/or in the competent court of law.
**
The writer is a former governor of the State Bank of Pakistan.
Bacha jamoora :cobra:
Kindly refer to post 
