Digging deeper into debt trap

Dr Ikramul Haq

The alarming burden of ever-increasing national debt during the tenure of coalition Government of Pakistan Tehreek-i-Insaf (PTI) has recently been highlighted by the Institute of Policy Reforms (IPR) in its brief report, “Pakistan’s debt and debt servicing is cause for concern” [hereinafter “the IRP Report”]. In these columns, the issue of mounting debt and its repercussions has been discussed with suggestions to overcome the same, but unfortunately, the PTI Government, like its predecessors, has paid no heed.

The IRP Report starts with the fact that “in FY 20 alone, Pakistan added Rs. 4.3 trillion to its total debt and liabilities. This amount is 10.4 % of GDP. In two years, total debt and liabilities have grown by a massive Rs. 14.7 trillion. This shows weak fiscal management as well as inability to stimulate growth in the productive sectors. It also reflects a failure to introduce the necessary reforms in key sectors of energy and power”.

Much before the IRP Report of October 2020, in ‘Trapped in vicious external debts’, Daily Times, August 1, 2020, it was emphasised that the daunting challenge before the PTI Government would be managing debt burden. It was suggested, “The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of State lands for commercial purpose by giving them on lease through public auction, and collection of taxes fairly and justly, but firmly, without any favour or fear”. The IRP Report has also emphasised: “While government often ascribes increase in debt to exchange value changes, the picture is more complex. Domestic debt has grown at an equal pace and external debt has grown in US dollars. The increase in domestic debt is because of weak FBR revenue collection, where attempt to reform may have had the opposite effect of what was intended. High discount rate, with no apparent economic logic, slowed down the economy, and with it tax revenue. Despite increase in power tariff, revenue collection by DISCOs have not improved. Consequently, in addition to government borrowings, PSE debt has increased”.  

No doubt that the PTI Government started its term with exceptional debt burden, record fiscal and current account deficits, forcing it to more borrowing, increasing taxes and devaluating rupee. This was all due to imprudent policies of the economic wizard of Pakistan Muslim League (Nawaz), Ishaq Dar, now a proclaimed offender. Pushing Pakistan to horrific debt-enslavement on the part of PMLN was the worst one could expect from any responsible government. In utter violation of section 3(b) of the Fiscal Responsibility and Public Debt Limitation Act, 2005, “beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product”, PMLN increased it by 27%. The IRP Report should have mentioned it as its CEO and his brother [looking after FBR] also served the PMLN.

Since the assumption of power, the PTI Government has been trying its best to undo the ugly and painful economic legacy of the previous regimes. However, it is strange and shocking that when the country needs export-led growth to come out of debt prison, especially huge external loans and liabilities, FBR is still blocking refunds of billions of rupees, especially of exporters. The Government must pay all the outstanding refunds without any further delay and zero-tax regime for exporters should be restored, rather than accumulating debt that FBR would never be in a position to pay due to irrational target fixed on the command of International Monetary Fund (IMF).

The IPR Report mentions that the Pakistan’s external debt and liabilities amounted to $95 billion by June 30, 2018 and the PTI Government increased these to almost $113 billion by June 30, 2020. By June 30, 2020 external debt and liabilities were 45% of GDP. It was 30% of GDP in 2018 and 25% in 2013, according to the IPR Report. The most worrisome aspect, as per the IPR Report, is that foreign debt “is used mostly for balance of payments and budgetary support and there is no way of knowing how it will be paid back”.

 The IPR Report says nothing about huge shortage of cotton bails and subsidy to sugar mills. The ECC decided to withdraw the 3% regulatory duty, 2% additional customs duty and 5% sales tax on imported cotton from January 15, 2020. What a tragedy that the local farmers have not been given any incentive to produce quality lint so that we could have saved precious foreign exchange on import of raw material that once we were exporting after meeting our local needs. The farmers are neither trained nor supported by providing certified seed to produce quality cotton. While the sugar mills of CEO of IRP and others got relief of billions, we witnessed sugar/cotton/wheat crises! It shows where the actual problem lies. We have failed to increase exportable surplus in agricultural sector, increase productivity and quality, reduce costs and establish agro-based industries capable of meeting local demands and producing value-added exportable surplus.

The withdrawal of oppressive and anti-growth taxes is necessary if the PTI Government wants to boost growth after heavy economic toll of Covid-19 endemic. In the present circumstances, businesses are struggling for survival and revival. They should be helped by lowering taxes. The Government needs to drastically reduce wasteful expenses and get rid of all loss-bearing public sector enterprises. The Government must reconsider its tax policy for encouraging growth and investment, if it wants to avoid further deepening of debt trap. The Government has so far failed to give due weightage to recent research studies of Pakistan Institute of Development Economics (PIDE), Doing Taxes Better: Simplify, Open & Grow Economy and Growth inclusive tax policy: A reform proposal, quoting Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016).

Our emphasis should be on growth, productivity and enhancing exports through diversification and value addition. These have already been discussed in detail in many articles, FBR: reforms, refunds & cleansing, Daily Times, September 6, 2020, PTI’s failure on fiscal front, Daily Times, June 28, 2020 and Budget 2020: Paradigm shift needed, Daily Times, May 11, 2020—just to mention a few.

The economic managers should think out of box to come out of ‘debt prison’. The wizards sitting in Ministry of Finance might have read the news item ‘Greek Saga Ends With the Closing of IMF’s Office in Athens’, published on January 8, 2020 by Bloomberg. Are they considering the same ways and means discussed therein to reduce debt burden, bidding farewell to IMF and becoming self-reliant through a well-thought-of plan [from structural reforms in all areas to import substitution to export-led growth, from reducing wasteful expenses to utilizing untapped resources, from imparting technical know-how to boost IT/SME sector etc.] that was discussed in ‘Budget 2020-21: inventive measures’, Daily Times, June 7, 2020. Have they studied the paper [Economy of Debt: Alternatives to Austerity and Neoliberalism in Pakistan by Ammar Rashid, M. Nawfal Saleemi and Aasim Sajjad Akhtar] on which PIDE held a seminar on January 9, 2019? The answer appears to be NO!  

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation and Visiting Faculty at Lahore University of Management Sciences (LUMS).

He has also coauthored with Huzaima Bukhari many books that include Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.