The debt trap

Around June 2019, Prime Minister Imran Khan announced the setting up of a debt commission to investigate the increase in debt over the period 2008-2018.

The PM believed that the increase during this period was significant and without any justification. He attributed this increase to corruption – of course, the easiest manner to accuse your opponents. He promised the nation he would spare no one who had been responsible for the debt accumulated during those 10 years. This was in line with Imran Khan’s consistent stand before coming into power. He repeatedly quoted various figures to justify his concern of massive borrowing by the two previous governments.

There was however no merit in what Imran Khan and the top PTI leadership believed regarding the debt increase during the period 2008-2018. Within a few weeks of the setting up of the debt commission, I wrote an article in this newspaper (‘Debt Commission- a non-starter’). There is nothing wrong in investigating an important subject like debt but when the assumptions are all wrong and not based on any intelligent understanding or facts, the commission was bound to fail as predicted at the time.

Imran Khan as PM is not expected to be an expert on economic and financial matters but what does it say about the top financial gurus sitting in the cabinet or those advising him before the elections. It seems no one within the top hierarchy had even a basic understanding of economics and financial matters. That also explains the spectacular failure we have witnessed in the last two years.

The debt commission has failed – as we all expected. Rather than accusing its political opponents, the current government is now faced with the embarrassment of defending its own record in accumulating record debt in its first two years.

Let’s review the numbers to understand it better. According to the State Bank, and also recently confirmed by the finance ministry, total public debt in June 2013 was Rs14.25 trillion. At the end of the PML-N’s five years, total public debt was Rs24.95 trillion – an increase of Rs10.70 trillion. This is total public debt and includes both domestic and foreign debt. This does not include liabilities. Simply stated, during the period 2013-2018, the PML-N government borrowed an average of Rs2.14 trillion per annum.

Let’s now compare this with the amount of borrowing during the past two years of the PTI government. Starting with a total public debt of Rs24.95 trillion, it now stands at Rs36.30 trillion – a staggering increase of Rs11.35 trillion in just two years. Let me also clarify something important here. The PM and senior leaders of the ruling party claim that the increase is abnormal because an amount of Rs5 trillion has been repaid during the last two years. Had that amount not been paid, the increase in debt would have been Rs16.35 trillion and not Rs11.35 trillion. So, this amount of Rs11.35 trillion is a net increase after repayments.

One hopes the PTI leadership, including the PM, will not play with such basic numbers to justify the abnormal increase. On an annual basis, the current government has borrowed Rs5.68 trillion compared to Rs2.14 trillion in the preceding five years. What looks better – Rs10.7 trillion borrowing in five years or Rs11.35 trillion in two years? Yet the PTI leadership does not get tired of accusing the previous government of unprecedented borrowing. If Rs10.7 trillion of borrowing required a debt commission, why not investigate Rs11.35 trillion borrowing in just two years.

The numbers are mind-boggling. A 45 percent increase in public debt within two years? This for a party which committed to reduce public debt from Rs24.95 trillion to Rs20 trillion. Instead, it now stands at a whopping Rs36.3 trillion. This commitment to reduce to Rs20 trillion was given in Feb 2019 by the PM himself. What does it say of the planning process or more specifically the understanding of the current leadership?

The PML-N government was also accused by the PTI for increasing debt-to-GDP ratio above 70 percent (72 percent, to be exact, at the end of its five years). During its two years in office, the debt-to-GDP ratio has now reached 87 percent – an increase of 15 percent in only two years.

Let’s look at the main reasons for the unusual increase in borrowing. In the last two years, we have witnessed high fiscal deficits – 8.9 percent in 2019 and 8.1 percent in 2020. Back to back increase of more than 8 percent has never been seen in our history. The 8.9 percent fiscal deficit was the largest in the last 40 years. The large fiscal deficits naturally led to higher borrowings in both the years. The large fiscal deficits were primarily due to massive shortfall in tax collection – an approximately Rs2 trillion shortfall in two years against its own set targets.

Other reasons that contributed to significant debt accumulation included higher interest rates, steep currency devaluation and a 66 percent increase in debt of public-sector corporations.

When you consider total debt and liabilities, the increase is Rs14.6 trillion or 49 percent in two years. Only the second time in history have debt and liabilities as a percentage of GDP been higher than the size of the economy – to be exact, 106 percent of GDP.

As far as external debt is concerned, there has been an increase of 54 percent in two years. And this does not include the $5 billion borrowed from Saudi Arabia and the UAE.

For a government which came into power on the promise of containing further increase in debt, the numbers given above are not only embarrassing but seriously worrisome. Like all other sectors, it had no preparations to manage the debt portfolio. When important people with no understanding of complex issues sit on judgement on serious matters like debt management or overall economic matters, the results will only be disastrous. Without consideration of the consequences, it allowed massive devaluation and a significant increase in discount rate. The massive revenue shortfall and increased expenditure has resulted in the highest ever accumulation of debt in two years.

The unprecedented increase in debt has not even contributed towards economic growth. On the contrary, the economy has nosedived in a manner never seen in our history. Rightly, people wonder what it was all about. What benefits did we get in return for this massive debt increase? Can we identify major infrastructure projects or new projects in the power sector or new motorways?

More than a year since the debt commission was set up, there is still no word from the PM or anyone in the government. What does it show? Some would say: poor governance, incompetence and a complete lack of understanding. Will anyone in the government come up with an explanation?

The writer is former governor Sindh and former minister for privatisation.