Federal Finance Minister Ishaq Dar while chairing a meeting to review the status of public debt and the arrangements in place for debt management accused ‘certain individuals’ of creating misconceptions in relation to the country’s debt situation and added that it is the responsibility of the government to place facts before the public.
Dar has always maintained, in line with basic economic theory, that the debt to Gross Domestic Product (GDP) ratio is the critical indicator of the sustainability of debt and not the rise in total debt from one year to the next. His critics, notably members of the opposition, focus on the rise in external and domestic debt since he took over the finance portfolio in absolute as opposed to percentage terms.
But independent economists have expressed serious reservations with respect to data released not only by the Federal Bureau of Statistics, which is under the administrative control of the Finance Ministry, but also recent data released by the State Bank of Pakistan (SBP) in its 2014-15 annual report.
During the tenure of previous finance ministers the SBP annual reports were, by and large, considered more credible and their analyses more scholarly. However, economists have not exhibited the same comfort level with the most recent report because it was delayed by around 6 months which, informed sources revealed to Business Recorder, was due to a review and revision by the federal authorities thereby limiting its relevance.
The SBP report maintains that while in 2013-14 the debt to GDP ratio was 65.1 percent it came down to 64.8 percent in 2014-15. This rate is above the 60 percent allowed under the Fiscal Responsibility and Debt Limitation Act passed in 2005 during the Musharraf era.
In the eighth International Monetary Fund staff review less than two months ago the authorities claim that “we will seek the Fund’s advice on options to strengthen the FRDL Act in terms of operational and procedural aspects such as an appropriate fiscal policy anchor, medium term orientation of the budget process and policy co-ordination across all layers of government.”
This obviously raises the question about the implementation of any Act by any subsequent government in this regard. Be that as it may, the debt to GDP rate is widely believed by economists to be understated mainly because the GDP is almost routinely being overstated since Ishaq Dar took over the Finance portfolio and this charge is proved by the fact that (i) Dar inexplicably reduced the growth rate of GDP two years after he became the Finance Minister just so he could claim that during the first year of his tenure the growth rate was the highest in six years; and (ii) there appears to be a singular lack of rationalization of GDP components for example construction is seen to rise by double the rise in cement.
SBP report 2014-15 also maintains that total public debt is within the bounds of sustainability as it is around 3.5 times and debt servicing is below 30 percent of government revenue. However sadly there is no mention of an over-valued rupee that is artificially keeping the total public debt within the bounds of sustainability.
IMF mission leader’s major faux pas has past unnoticed by the Fund’s management notably his statement during a press conference in Islamabad in October that the rupee was over-valued from 5 to 20 percent – a range inexplicably too wide from an institution that specialises in currency values.
To conclude, the eighth IMF review notes that the time-bound condition of a Debt Policy Co-ordination Office (DPCO) as a middle office responsible for updating MTDS and monitoring its implementation, co-ordinating the credit risk management functions has been met.
The DPCO subheading on the Ministry of Finance website gives a debt policy statement for 2014-15 stating that objectives of public debt management include: (i) fulfilling the financing needs of the government keeping in view cost-risk trade-offs; (ii) development of domestic debt capital market (iii) lengthening of maturities of domestic debt instruments at a reasonable cost; and (iv) stimulation of concessional external financing with reference to its impact on macroeconomic stability and debt sustainability. There is therefore an urgent need for DPCO to begin to guide the government rather than to echo the government’s priorities and views.