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  • Mar 8th, 2018
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The Pakistan Peoples' Party Senator, Sherry Rehman, stated on the floor of the House that domestic borrowing is over 16 trillion rupees, more than the total annual budget outlay for the year. The Economic Survey 2016-17, released by the Economic Advisor's Wing that is administratively under the control of the Ministry of Finance, gives the provisional gross domestic debt for last fiscal year (2017) at 14.7 trillion rupees. And the State Bank of Pakistan website gives the provisional total till December 2017 at 15.4 trillion rupees. It is logical therefore for Senator Rehman to assume that the government borrowing during January and February 2018 resulted in increasing the domestic debt to more than 16 trillion rupees.

This assumption is all the more credible given the severe resource constraints of the incumbent government fuelled by the reluctance of multilaterals and bilaterals to extend programme loans (budget support) due to their lack of confidence in the government adhering to the reform agenda subsequent to the completion of the three-year Extended Fund Facility by the International Monetary Fund (September 2013 to September 2016) which had required rigid quarterly monitoring. The impending elections have further undermined the ability of the Abbasi-led administration to cut down expenditure leading to a widening budget deficit that requires plugging in through domestic debt.

Budget documents for the current year indicate that the total budgeted expenditure for 2017-18 was 4.7 trillion rupees or in other words, Senator Sherry Rehman was correct in stating that the disparity between domestic debt and budget should be a source of concern. From the perspective of economic theory, the disparity between debt and deficit is not quite a source of concern if it is within certain limits. State Minister for Finance Rana Mohammad Afzal Khan, instead of citing economic theory and claiming that Pakistan had never defaulted on its debt so far, a rationale that is only partially correct as the Pakistan government's capacity to repay this debt is becoming increasingly challenging (prompting the government to reduce the rate of return on national savings schemes), held the PPP-led coalition government responsible for the sharp increase in debt. His claim was that domestic debt was 1.8 trillion rupees in 2012-13 - which is a mere 11 percent of total domestic debt of 16 trillion rupees today. Incidentally, it is also relevant to note that in 2012-13, the then functional Finance Minister Ishaq Dar had retired 480 billion rupees energy sector's circular debt on the second last day of the fiscal year and therefore Afzal may have overestimated the PPP government's responsibility in the domestic debt of that year.

Rana Afzal added that the domestic debt to GDP ratio is manageable and pointed out that as per the Fiscal Responsibility and Debt Limitation Act 2005, the government has to inform parliament if it exceeds 60 percent. True and a valid point; however, the government has been consistently understating the debt to GDP ratio - by understating the debt and overstating the GDP - with economists maintaining that the debt to GDP ratio is close to 70 percent at present which must be a source of concern as, unlike Greece supported by the European Union, Pakistan has no recourse to external assistance.

Rana Afzal's spirited defence was neither based on economically sound logic nor indeed on ground realities - a defence that was to be expected given his academic background in electrical engineering and an MA in political science. During two of its three tenures, the PML-N leadership has selected non-economists as the Finance Minister, which explains the state of the economy today; and this in spite of the fact that the party has well known economists within its ranks, including Sartaj Aziz. In contrast, the PPP has felt no qualms about appointing qualified technocrats in its ranks though the party leadership routinely diluted their politically challenging reforms.

Copyright Business Recorder, 2018

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