Debt is more expensive than we think – Business

Would you believe that for every 100 rupees the federal government spends each year, Rs52 goes to debt service? Unfortunately, this is true.

In the period July-September 2022, the federal government’s current expenditures amounted to Rs 1,832 trillion. Of this, Rs954 billion was used to service domestic and foreign debt, according to the quarterly tax review. Domestic debt service alone consumed 835 billion rupees, which is about 45.6 percent of current federal spending. The remaining Rs119bn or approximately 6.5% of current expenses were used to service the external debt.

These numbers are alarming. What is more disturbing is that there is no indication that they will see substantial changes for the better in the next three quarters of the current fiscal year. Domestic debt service will continue to grow as high interest rates on government commercial bank loans are likely to remain high. Take a look at all of the recent Pakistani Treasury Bills and Investment Bonds auctions and you may notice an upward trend in yields that persists.

Serving foreign debt will cost even more in rupees terms if the rupee stays down against major global currencies, particularly 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 the good news about bailout forex inflows from international financial institutions (IFIs) as well as Saudi Arabia and China can do is help the rupee make some momentary gains.

Decreasing development spending will continue to undermine economic growth year after year, further necessitating future domestic and foreign loans

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

Furthermore, the cost of funds currently obtained by IFIs is relevant in the context of the future service of external debt. What matters is also under what conditions and in what forms the promised $ 9 billion forex support would come from China and $ 4.2 billion from Saudi Arabia.

The higher cost of IFI funds and commercial loans packaged into the overall Chinese and Saudi forex support would obviously add to the cost of servicing the external debt within this fiscal year and beyond. The latest example of the most expensive foreign debt is a $ 500 million budget support loan Pakistan is looking for from the Asian Infrastructure Investment Bank (AIIB). The government recently approved the terms of this loan. The loan will come at a rate of around 5%, higher than that applicable on some foreign bank loans, according to credible media.

In the period July-September 2022, defense spending was approximately 313 billion rupees or 17% of the federal government’s current spending. This means that domestic and foreign debt service (52%) and defense spending (17%) together made up 69% of total federal government spending. Where do you think the remaining 31% of current spending goes? This went to government employee pensions (9.3%), day-to-day government management (5.6%), grants (5%) and grants (10.9%). Such a high expense for each of these heads requires inner research and control. It is not true?

Some pertinent questions are: What results have the pension reforms undertaken by the PTI government produced? Why hasn’t the size of the government bureaucracy been reduced as recommended by the reform leader, Dr. Ishrat Husain?

Can a resource-hungry country like Pakistan afford to spend up to 5.6% of its current spending just on 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 grants offered to the various segments of society and business well targeted and producing the desired results? If not, what is being done to make grants more targeted and results-oriented?

Where does the money allocated under “Concessions to others (other than those covered by grants) go to”? And what results have they produced so far? Federal “grants” normally go to provinces but also to bloody state enterprises (SOEs).

The nation has a right to know why financially corrupt and bleeding SOEs continue to receive “grants” and whether the offering of rescue “grants” has produced tangible and positive results.

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

How come? When will our loss-making SOEs ever be privatized? What is causing delays and how can these delays be overcome?

During July-September 2022, a tight fiscal position led to very low development spending: only 219 billion rupees of which 67 billion rupees came from the federal government and the remaining 152 billion rupees from the provinces.

Compare this national development expenditure of Rs219bn with Rs835bn spent alone on domestic debt service. In simpler terms, it means that out of every Rs. 1,054 our government has in hand, it spends Rs 835 to pay internal debt surcharges and only Rs 219 for development. Where has decades-old fiscal misconduct led to Pakistan? Is it sustainable even for another decade?

Development spending guarantees future economic growth. If development spending remains as low as it is today for a few more years, the result will be horrific for the economy. The decrease in development spending will continue to undermine economic growth year after year, further necessitating the generation of domestic and foreign loans.

And this means that debt service alone will continue to consume most of the budgetary resources, leaving fewer and fewer resources not only for development but, moving forward, also for defense.

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

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