Debt is costlier than we think – Business

Would you believe that out of every 100 rupees the federal government spends each year, Rs52 goes on debt servicing? Sadly, this is true.

During July-September 2022, the current expenses of the federal government totalled Rs1.832 trillion. Of this, Rs954 billion was used for domestic and foreign debt servicing, according to the quarterly fiscal review. Domestic debt servicing alone consumed Rs835bn, which equals about 45.6 per cent of the current federal expenses. The remaining Rs119bn or roughly 6.5pc of the current expenses were used for foreign debt servicing.

These numbers are alarming. What is more disturbing is that there is no indication that they will see any substantial change for the better in the next three quarters of the current fiscal year. Domestic debt servicing will continue to grow as high-interest rates on the government’s commercial bank borrowing will likely remain high. Look at any recent treasury bills and Pakistan Investment Bonds auction, and you may see a trend of rising yields persisting.

Foreign debt servicing will also cost more in rupees terms if the rupee remains on the downward slide vis-à-vis major global currencies, especially the US dollar.

The Ministry of Finance and the State Bank of Pakistan (SBP) are making strenuous efforts to save the rupee from further depreciation. But all that good news of bailout forex inflows from international financial institutions (IFIs) as well as from Saudi Arabia and China can do is help the rupee make some momentary gains.

Dwindling development expenses will continue to compromise economic growth year after year, further necessitating future domestic and foreign loans

The local currency can become sustainably strong only when non-debt-creating forex inflows of exports, remittances and foreign direct investment become thick enough to make a real impact. That is not possible in the near future.

Besides, the cost of funds currently being obtained from IFIs matters in the context of future foreign debt servicing. What also matters is on what conditions and in what forms the promised $9bn forex support would come from China and that of $4.2bn from Saudi Arabia.

Higher cost of funds of IFIs and commercial loans packaged in overall Chinese and Saudi forex support would obviously add to the cost of foreign debt servicing within this fiscal year and beyond. The latest example of costlier foreign debt is a $500 million budget support loan that Pakistan is seeking from the Asian Infrastructure Investment Bank (AIIB). The government has recently okayed the terms of this loan. The loan will come at a rate of about 5pc, higher than applicable on some foreign bank loans, according to credible media reports.

During July-September 2022, defence spending totalled about Rs313bn or 17pc of the federal government’s current expenses. This means that domestic and foreign debt servicing (52pc) and Defence spending (17pc) together made up 69pc of the federal government’s total spending. Where do you think the remaining 31pc of the current spending goes? That went to government employees’ pensions (9.3pc), day-to-day running of the government (5.6pc), subsidies (5pc) and grants (10.9pc). Such high spending on each of these heads requires some soul-searching and scrutiny. Doesn’t it?

Some pertinent questions are: What results did the pension reforms undertaken by the PTI government produce? Why was the size of the government bureaucracy not cut as recommended by the reforms’ leader Dr Ishrat Husain?

Can a resource-starved country like Pakistan afford to spend as much as 5.6pc of its current expenses on just running the government? Why can’t this huge expense be reduced by reducing the size of the cabinet, the number of ministries and divisions and by opting for austerity everywhere in the federal government?

Are the subsidies being offered to various segments of society and businesses well-targeted, and have they been producing the desired outcomes? If not, what is being done to make subsidies more targeted and result-oriented?

Where the money allocated under “Grants to others (other than those covered by subsidies)” is going? And what results have they produced so far? Federal “Grants” normally go to provinces but also to bleeding state-owned enterprises (SOEs).

The nation has the right to know why financially corrupt and bleeding SOEs continue to get “grants” and whether the offering of bailout “grants” to them has produced any tangible, positive results.

The PML-N-led coalition government had promised to speed up the privatisation process, but during July-September, not a single rupee was generated through privatisation, as the fiscal review reveals.

Why? When on earth will our loss-making SOEs be privatised? What is causing delays, and how can those delays be overcome?

During July-September 2022, a tight fiscal position led to very low development spending — just Rs219bn of which Rs67bn came from the federal government and the remaining Rs152bn from provinces.

Compare this national development spending of Rs219bn with Rs835bn spent alone on domestic debt servicing. In plainer words, it means that out of every 1,054 rupees our government has in hand, it spends Rs835 on paying markups on domestic debts and only Rs219 on development. Where has decades-old fiscal misconduct brought Pakistan to? Is this sustainable even for one more decade?

Development spending ensures future economic growth. If development expenses remain as low as they are today for a few more years, the outcome will be horrible for the economy. Dwindling development expenses will continue to compromise economic growth year after year, further necessitating the generation of domestic and foreign loans.

And that means debt servicing alone will continue to consume the bulk of budgetary resources — leaving lesser and lesser not only for development but, going forward, also for defence.

Published in Dawn, The Business and Finance Weekly, November 14th, 2022

Read More: Debt is costlier than we think – Business

2022-11-13 20:26:42

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