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Pakistan Debt Policy 2014

Recording the public debt-to-GDP ratio at 62.7 per cent by the end of fiscal year 2012-13, the `Debt Policy Statement 2013-14` released by the Ministry of Finance on Monday suggests the government to adopt an integrated approach for economic revival and debt reduction strategy.

These measures will require some `difficult trade-offs` in the short-term, thus implementing the structural reforms that boost potential growth is a key to ensure debt sustainability, according to the statement.`Crossing of this threshold by 2.7pc was mainly due to the actual deficit being higher than projected,` the statement said.

The public debt also includes loans from IMF amounting to $4.4bn or 1.0pc of the GDP as on June 30, 2013. The borrowing from IMF is only utilised towards balance of payments support and is reflected in foreign currency reserves of the country, the statement explained.

The condition of reducing debt-to-GDP ratio by 2.5pc annually was envisaged in the `Fiscal Responsibility and Debt Limitation Act 2005` to achieve the core objective of reducing debt-to-GDP ratio below 60pc by the end of 2012-13. As the government achieved this landmark in 2005-06 and remained within the threshold of 60pc, the sub-limit of annual reduction of 2.5pc was no more applicable, the finance ministry document says. During 2012-13, the government issued fresh and rollover guarantees aggregating to Rs.136 bn or 0.6pc of the GDP.

Total outstanding stock at the end of June 30, 2013 amounted to Rs626bn and the rupee guarantees accounted for 57pc of the total guarantees stock. There are costs associated with the provision of government guarantees, and in the case of Pakistan, these include explicit and implicit guarantees issued to public sector enterprises and unfunded losses of these entities.

At the end of the first quarter of current fiscal year, the government issued fresh and rollover guarantees amounting to Rs54bn or 0.2pc of the GDP. The total outstanding stock at the end of September 2013 amounted to Rs.677bn. The outstanding stock issued against commodity operations, in the same period was Rs.513 bn, statement says.Other than the publicly guaranteed debt of public sector enterprises, government issues counter guarantees against the commodity financing operations undertaken by TCP, PASCCO and provincial governments.

As of June 30, 2013, the outstanding stock issued against commodity operations was Rs.571bn. According to the debt policy statement, social and poverty alleviation related budgetary expenditures remained at 7pc of the GDP. Additionally, expenditures on health and education stood at 0.7pc and 1.9pc of the GDP.

The FRDL Act stipulates that spending on health and education should be doubled to 1pc and 3.2pc respectively in 10 years, beginning July 1, 2013, hence the target was not achieved. Pakistan`s public debt position deteriorated during the past few years owing to higher interest payments, large subsidies, specially food and energy, growing security spending needs, narrow tax base and rising international commodity prices.

Given the severity of these constraints, the government was unable to fully comply with some provisions of FRDL Act.However, the government remains fully committed to adhere to all the provisions of FRDL Act in future, the debt policy statement said. These deficits are adding to public debt and consuming a major chunk of revenues for debt service.

Financing mix of deficit is also an area of concern as it is skewed towards domestic sources, particularly on bank borrowing, which is conducive to inflationary pressures, crowding out the private sector credit demands and at the same time, translates into higher debt servicing in view of higher domestic interest rates. The report says the government is witnessing negative revenue and primary balance for many years. The continuous revenue shortfall over current expenditure is a reflection of non-availability of fiscal space for undertaking development spending for which the government needs to generate a revenue surplus.

The government may exploit other avenues in terms of revenue mobilisation and regulate current expendi-ture to overcome revenue deficit. Similarly, it is necessary for the government to reduce gap between revenue and non-interest expenditure, which is an essential pre-requisite for public debt reduction, emphasizes the statement. `The sooner Pakistan achieves and maintains a primary surplus, the better it is for stabilizing country`s debt burden`, suggests the debt policy statement.

Soundness of the debt position remained higher than the internationally accepted thresholds, and since total public debt level around 3.5 times and debt servicing below 30pc of government revenue are generally believed to be within the bonds of sustainability, the government was making concerted efforts to increase the revenues and rationalise current expenditure to reduce the debt burden and improve the debt carrying capacity of the country to finance the growth and development needs.

At the same time, the government was focusing on increasing export receipts and other foreign currency non-debt creating flows above and beyond the growth of foreign exchange payments and growth of external debt and liabilities.

 

Source: Daily Dawn

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