FeaturedNationalVolume 14 Issue # 12

Higher exports the only way to reduce debt burden

The debt crisis is worsening.  According to the latest data released by the State Bank, the country’s total debt (domestic and external) surged to an all-time high of Rs 26.453 trillion at the end of November, 2018, compared to Rs 24.212 trillion on 30th June, 2018, depicting an increase of Rs 2.24 trillion or 9.25 percent. While federal government’s domestic debt rose by Rs 907 billion to Rs 17.323 trillion, foreign debt witnessed a sharper increase as external borrowings shot up by Rs 1.334 trillion to reach Rs 9.13 trillion during the first five months of the current fiscal year. It may be mentioned here that the government increased its domestic debt through short-term borrowings, relying mainly on the treasury bills which increased by Rs 1.168 trillion to Rs 10.057 trillion during July-November 2018.

The jump of such a magnitude in total indebtedness of the country in a short period of five months reflects a higher fiscal deficit than envisaged at the time of budget formulation due to low revenue collection and growing current expenditures while the huge current account deficit has forced the authorities to seek foreign loans to meet the external gap. A considerable appreciation of the US dollar against the Pak rupee from about Rs 121 at end June to about Rs 140 by the end of November, 2018 – representing an appreciation of over 15 percent – was another reason for the sharp rise in external borrowings in rupee terms. However, whatever the reasons, the recent jump of nearly 10 percent in aggregate debt is bad news for the country. Moreover, this has been happening under the government of a party that came to power on the promise of self-reliance and greater austerity in every sphere of governance. Unfortunately, however, the PTI government has so far been unable to meet this commitment as indicated by growing fiscal deficit woes.

The government has to come up with concrete plans to reduce and ultimately eliminate the present level of budget deficit so that the level of domestic debt is contained to a reasonable level. So far as the external sector is concerned, the government has made the right moves to narrow the trade deficit by substantially depreciating the Pak rupee and imposing duties on various items of imports. Though these steps are in the right direction, they have so far not made a large impact on the current account balance, forcing the government to borrow extensively from friendly countries in order to address the country’s current account and arrest the dwindling trend in foreign exchange reserves. The country has so far received dollar 2 billion from Saudi Arabia while the authorities expect to get more from the UAE, China and Qatar.

The Fiscal Responsibility and Debt Limitation (FRDL) Bill aimed at eliminating the revenue deficit and reducing public debt to a prudent level was passed by the National Assembly on 3 March, 2005. The bill, as passed, was meant to bring down the revenue deficit to zero by 30 June, 2008, and maintain a revenue surplus thereafter to reduce total public debt to 60 percent of GDP by June, and maintain it below this level in the subsequent years. The government was bound to keep the National Assembly informed about emerging scenarios in the relevant fields and any deviations from the set course were only to be allowed in exceptional circumstances. Alas, this bill which could act as a guarantee for sound fiscal management was violated with impunity. The present government could highlight the limitations imposed by this bill for ensuring prudent fiscal management and contain the rising level of domestic debt.

All said and done, the basic reason for the rising debt burden is the gap between imports and exports. While imports have been going up, exports have been stagnant. This external gap ultimately translates into budget deficit which is covered through foreign loans. We did not have the wise leadership required to build productive capacity in the domestic economy to create exportable surpluses. Instead, we fell into the trap of building a consumer-oriented economy based on cheap imports, which is attractive in the short run, but enormously costly in the long run.

It is atrocious that an agricultural country like Pakistan imports $6 billion worth of agricultural products, like food, raw cotton, edible oil. The future is in our hands. We can continue to borrow, from other sources, and maintain an economy driven by consumption, and by industries which make profits by using artificially cheap imports. Or we can bite the bullet and go for the structural transformation required to create productivity in the domestic economy, which is the only route to sustainable growth. The industries which could have come into existence, had imports been expensive were never born. If we can sustain the policy of keeping aggregate demand in domestic products high, higher prices in the desired sectors will lead to creation of extra productive capacity and stimulate domestic industry, which is exactly what is needed. More exports is the only way to reduce our dependence on foreign loans which create serious distortions in the economy.