• Thursday, August 13, 2020

Dealing with ‘debtocracy’

Discussion in 'Pakistan Economy' started by Norwegian, Feb 14, 2020.

  1. Norwegian

    Norwegian ELITE MEMBER

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    Dealing with ‘debtocracy’
    By HUZAIMA BUKHARI AND DR IKRAMUL HAQ on February 14, 2020

    Total debt servicing increased by around 57 percent during FY 2018-19 compared with last fiscal year which was driven by higher domestic interest payments (on account of rise in domestic interest rates) while external debt repayments increased significantly and recorded at Rs 974 billion during FY 2018-19 compared with Rs 450 billion during last fiscal year. The interest servicing grew by around 39 percent during FY 2018-19 compared with last fiscal year mainly due to increased borrowing on account of higher than budgeted fiscal deficit, increase in domestic interest rates as well as depreciation of Pak Rupee against main international currencies also contributed towards this rise-Fiscal Policy Statement 2019-20, issued by Debt Policy Coordination Office of Ministry of Finance

    Public debt as percentage of GDP was recorded at 84.8 percent at end June 2019 compared with 72.1 percent at end June 2018. This increase was primarily due to the build-up of liquidity buffers and higher exchange rate depreciation-Debt Policy Statement 2019-20, Debt Policy Coordination Office, Ministry of Finance.

    Lower revenue collection and a sharp rise in current expenditures caused a deterioration in fiscal indicators during FY 2018-19 i.e. the government registered a primary deficit of 3.4 percent of GDP and an overall deficit of 8.9 percent of GDP, against its revised target of 1.8 percent and 7.2 percent, respectively. Similarly, revenue deficit also witnessed a significant increase and was recorded at 5.6 percent of GDP compared with its revised target of 3.8 percent of GDP-Fiscal Policy Statement 2019-20, issued by Debt Policy Coordination Office of Ministry of Finance

    All indicators show that our successive governments, including the incumbent one, due to imprudent economic and tax policies, have pushed Pakistan into chronic, unremitting, unceasing debt-enslavement. ‘Debtocracy', a term yet to become part of public discourse, is not merely an economic issue. It has multi-faceted political connotations. Once a nation is trapped in the ‘debt prison', its natural consequence is political subjugation. The exploitative Neo-Colonial powers through lenders like International Monetary Fund (IMF) and others, make the enslaved and subjugated to obey their commands and follow agenda set by them. Pakistan is a classic study of being victim of ‘debtocracy' leading to economic and political subjugation. This economic bondage is a modern form of slavery having devastating effects. The subjugated/slaves live in a permanent state of submission, pain, suffering and subordination. In the capitalist world, the ‘debt-slavery-syndrome' represents a perpetual despair and never-ending suffering for both individuals and nations.

    Economists mention debts and liabilities only in numbers, e.g., Pakistan's public debt has touched the dangerous level of 84.4% of GDP. Of course, numbers are important, but more vital is discussion on all aspects of debtocracy-a new form of slavery that needs to be exposed and countered. Unless we get rid of it through self-reliance and by exploiting our indigenous natural and human resources, our economic miseries will not end. The fundamental question that needs to be debated is: why in the name of people, our elites have been recklessly borrowing money and paying huge amounts in debt servicing, which is now three times of the amount we spend on defence!

    History of subjugation and resistance in various parts of the world presents vital lessons for humanity. Debt shackles cannot be broken without waging resistance against elites and the oppressors. India under the British Raj was ruthlessly plundered-see details in ‘An Era of Darkness: The British Empire in India' by Shashi Tharoor and ‘Class Structure of Pakistan' by Dr Taimur Rahman. One needs to recall ‘Salt March', also called Dandi March or Salt Satyagraha, the historic non-violent protest led by Gandhi in March-April 1930. The march was the first act in an even-larger campaign of later civil disobedience (satyagraha). Among others, Martin Luther King, Jr. later cited the Salt March as a crucial influence on his own philosophy of civil disobedience. Gandhi, he said, had sent a simple message by grasping a handful of salt on the beach at Dandi, and millions answered his call.

    Many years back we wrote: “When the colonial masters imposed salt tax in the Subcontinent, a grand disobedience movement (andolan) was launched and they were forced to withdraw it. In the so-called post-independence period, our rulers and tax managers have proved to be even crueler than the colonial rulers were as they levied tax on salt sold under branded names, knowing that these days majority buys the same and sale of salt in non-packing form is hardly in practice".

    As elsewhere in the world, subjugation and submission before the IMF (many call it New East India Company) have led to oppressive taxes, even on items of daily use by the poorest of poor, like sugar, wheat, flour, pulses etc. What makes the situation more painful is the fact that ‘debtocratic subjugation' is all-pervasive and has created “learned helplessness". The people even after monstrous food inflation are showing endurance/submission. There are no mass protests as witnessed in the past in many countries. The Opposition parties being culprit of accumulating debt will never mobilise the masses for non-violent protests on the issue. Debate is only confined to TV talk shows and there too zealous defenders of the present governments-federal and provincial-make every effort to justify it showing “mercy" for the poor by way of charity.

    The most loathsome legacy of the five-year term (2013-18) of Pakistan Muslims League (Nawaz) [PMLN] was pushing the nation towards ‘debtocracy'. All governments, especially PMLN, borrowed recklessly, imposed harsh tax measures, and devaluing currency. The same path is adopted by the coalition government of Pakistan Tehreek-i-Insaf (PTI). With massive devaluation of currency and high interest rate by the State Bank of Pakistan (SBP), foreign/local liabilities have increased manifold.

    The government of PMLN took all kinds of steps, from introduction of cash margin to imposition of heavy regulatory duties on imports, but failed to curtail the current account and trade deficit. The trade deficit hit US$ 33.9 billion as imports increased to US$ 55.2 billion during July 2017 to May 2018. Even 14% devaluation of the rupee in December 2017 onwards could not help in reducing the import bill.

    The unelected ex-Finance Minister, Miftah Ismail, on May 14, 2018 told the National Assembly that borrowing of Rs 22 trillion would be necessary for 2018-19 for payment of domestic/foreign debts/debt servicing. Thus for the newly elected government, the deadly debt trap was already laid by PMLN. Due to thoughtless policies of the economic wizard of PML-N, Muhammad Ishaq Dar, presently suspended senator and proclaimed offender, the country's external debt and liabilities reached US$ 98.16 billion by the end of February 28, 2018. The position of internal debts was equally alarming. According to SBP, it stood at Rs 26.8 trillion as on May 1, 2018. It was Rs 22.5 trillion as on June 30, 2017.


    The consequences of the economic mess created by PMLN were obvious: more borrowing and taxes by the new government of PTI after elections of 2018, going to IMF once again, so-called austerity measure leading to retarded growth, high inflation affecting fixed income earners and the poor. Further debts, more squeezing of fiscal space-enormous debt-servicing exceeding Rs 3,000 billion and deepening of deadly debt trap, that is, to borrow just to pay back interest on old debts.

    Historically, our rulers, military and civilian alike, have been seeking bailouts from IMF-many call these death-blows. With every loan came harsh conditions-ostensibly meant for economic revival/reforms leaving us in deeper quagmire. The Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality huge loans were secured for reforming (sic) the tax, banking and justice systems-just to mention a few. Fresh loans were negotiated with renewed enthusiasm by all the successive governments, including that of Pakistan People's Party (PPP) and now after PML-N, by the PTI, which before coming to power used to claim that it would make Pakistan self-reliant and never seek any IMF's bailout.

    Dr Abdul Hafeez Sheikh, now a favourite of Prime Minister Imran Khan, as Economic Minister of PPP signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 and got disbursements of about $7.6 billion. He failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful end on September 30, 2011. Now as PTI economic wizard, he has secured bailout from IMF of US$ 6 billion. A few days back under his ministry, Debt Policy Statement 2019-20 is finally released after a gap of 18 months. It needs to be prepared every year to fulfill the requirement of section 7 of the Fiscal Responsibility and Debt Limitation Act 2005 [“the Act"]. It presents many disturbing and worrisome facts about ‘debtocracy'. The successive governments not only breached the limit of 60% provided in the Act but also conceded vulnerabilities on many fronts-especially the continuous shortfall in revenue targets and phenomenal increase in current expenditures.

    According to the Debt Policy Statement 2019-20, total public debt as on June 30, 2019 was recorded at Rs. 32,708 billion showing an increase of Rs. 7,755 billion during fiscal year [FY] 2018-19-out of which Rs 3,635 billion (47%) was borrowed for meeting the federal budget deficit, Rs. 3,061 billion (39%) was due to currency depreciation; Rs. 927 billion (12%) was offset by higher cash balances necessary for effective cash management as the government was committed to zero borrowing from SBP in future, Rs. 132 billion (2%) was difference between the face value (which is used for recording of debt) and the realized value (which is recorded as budgetary receipt) of Pakistan Investment Bonds issued during the year.

    The Debt Policy Statement 2019-20 further reveals that “during FY 2018-19, public debt servicing was recorded at Rs. 3,065 billion against the annual budgeted estimate of Rs 2,396 billion. Total debt servicing increased by around 57% during FY 2018-19 compared with last fiscal year which was driven by higher domestic interest payments (on account of rise in domestic interest rates) while external debt repayments increased significantly and recorded at Rs. 974 billion FY 2018-19 compared with Rs 450 billion during last fiscal year." According to the Policy Statement, “during first half of FY 2019-20, investment in 12-months Treasury Bills (T-bills) and 3 to 10 years Government Bonds increased"-share of 3-months T-bills in total T-bills portfolio “reduced to around 29% percent at end December 2019 compared with around 100% percent at end June 2019".

    The responsibility of the fiasco on debt front, pointed out in the Debt Policy Statement 2019-20 does not mainly lie with the PTI Government. In fact, PMLN pushed Pakistan to horrific debt-enslavement committing blatant violation of section 3(b) of the Act: “beginning from the financial year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product." Instead of reducing and/or containing public debt at 60% of GDP, the PMLN Government increased it by 27%.

    During the decade of democracy [2008-2018], the Opposition parties also showed apathy by not raising a voice on the issue of gross violation of the Act. None of the Opposition parties announced a shadow cabinet or prepared a White Paper on the issue. It was their duty to create public awareness about the deadly consequences of rising debt burden and increase in debt servicing as the largest expenditure in the budget. Not a single Opposition party unveiled its own plans/strategies to meet the requirements mentioned in the Act.

    The claim by the PTI government that it was unaware of chronic situation on internal and external debt fronts on assumption of power in 2018 is a lame excuse as on May 14, 2018 in his budget speech, PMLN's ‘selected' Finance Minister told the National Assembly about the huge quantum of funds required to meet external obligations. No doubt, the start of term for the PTI was with exceptional debt burden, but despite knowing it well, they had no definitive plan to deal with it and unnecessarily delayed the deal with the IMF.

    The latest figures of total debt and liabilities at the end of first quarter of the current fiscal year of Rs 41,489.5 billion, available at the website of SBP, present an alarming situation. The main challenge is, however, how to handle it. The Debt Policy Statement 2019-20 in conclusion says:

    “Going forward, following are the main priorities with respect to public debt management over the medium term:

    * Government objective is to bring and maintain its Public Debt-to-GDP and Debt Service-to-Revenue ratios to sustainable levels through a combination of greater revenue mobilization, rationalization of current expenditure and efficient/productive utilization of debt.

    * For domestic debt market development, the government is planning to introduce various new instruments with the objective to meet government financing requirements at the lowest possible cost while providing additional avenue to investor in-line with their investment horizon and risk appetite/preference.

    * Government intends to broaden the universe of Shariah compliant securities (domestic as well as international).

    * Lengthening of maturity profile of domestic debt through enhanced mobilization from medium to long-term government securities will remain priority to reduce the re-financing and interest rate risks of domestic debt portfolio.

    * Government will continue to seek long-term concessional loans for development purposes".

    It is an admitted fact that prior to PTI government, all economic managers, during the military and civilian rules alike, have been borrowing recklessly and spending ruthlessly. Unfortunately, there persists massive wastage of funds on huge perks/perquisites/benefits to the privileged classes. The mundane reality of today's Pakistan is that elites – militro-judicial-civil complex, businessmen-turned-politicians and absentee landowners – are very affluent, but the government is poor, requiring loans even to pay its employees' salaries and other day-to-day expenses. This area is not even touched by the PTI Government as Debt Policy Statement 2019-20 concludes" as under:

    “Government is also taking necessary steps for ensuring fiscal discipline and consolidation, stabilizing the economy and accelerating growth. Accordingly, the government has started revamping the economy through structural reforms and stabilization measures such as broadening the tax base, reforming the Public Sector Enterprises (PSEs) and reducing the fiscal deficit, while ensuring that social safety net and development spending are not only protected but enhanced considerably. All these measures are expected to bring stability leading to gradual reduction in the fiscal deficit over next few years and subsequently would reduce the country's reliance on additional debt".

    The key to debt retirement is export-driven growth, creating exportable surplus, and import-substitution through rapid industrialisation with joint venture with foreign companies, collection of taxes fairly and drastic reduction in wasteful expenses. For achieving these goals, no concrete plans based on pragmatic and sound research are available with PTI Government! So far, there are only clichés as contained in the Debt Policy Statement 2018-19 and daily public pronouncements. There is a desire to make 2020 year of prosperity, but it cannot be done unless elitist structures are dismantled for which the PTI has no inclination. Like its predecessors, the PTI also believes in patchwork here and there that will never cure the system. The outrageous debt burden and huge fiscal and current account deficits are symptoms of illness of system. These symptoms will keep on recurring unless the causes for illness are cured. The removal of causes of illness (elitist economic structure, heavy unproductive expenses, non-tapping of natural and human resources and ending crony capitalism) needs will as well as concrete agenda. These are not available with the PTI government, at least the Debt Policy Statement 2018-19 clearly testifies to it.

    (The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are member Adjunct Faculty of Lahore University of Management Sciences)
     
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  2. ziaulislam

    ziaulislam ELITE MEMBER

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    The writer has no knowledge of what debt is or as atleast failed to give us an understanding of it..
    First local debt and foreign debt are two different things compeletly
    Second local debt and interest rate has one purpose to stimulate or control the economy. It should be controlled in such a way to maintain healthy saving, investment and growth. There is delicate balance between these three things. The reason why an idependent state bank exists (on paper)
    Last govt destroyed the balance by using the tool as growth driver leading to poor investment and savings. The current govt tried to bring it where it should be which led to debt increase(by devaluation and increase interest). If it hadnt the market would have collapsed under lacl of liquidity.
    The govt had to do a correction..a very rapid correction. The true debt everyone knew was at around 100% gdp even though if it was 70% on paper and hence why projection are made.

    You are going to loose cricket match when u have 30 runs in single ball even though u havent nt on paper yet
     
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  3. ejaz007

    ejaz007 SENIOR MEMBER

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    To understand the nature of debt payment one needs to have full picture of both local and foreign debt. Unfortunately no one tells the complete truth and only portrays picture that suites there interests or political motives.

    Every government blames previous government for the problems they face and then ends up creating more problems then solution.

    For PTI my personal opinion is that when they came to power it would have been prudent if they would have continued with the system that was in place and then gradually made plans and implemented them to achieve whatever their goals were.

    They were not ready for the task in hand that waited them and then made some basic mistakes to achieve their goals.

    One thing for example. When they came to power and understood that going to IMF/Word Bank was the only option then they should have approached them first and then the friendly countries. What they did was opposite and when the desired results were not achieved they went to IMF. By then IMF knew Pakistan did not have any other option left so they dictated their terms.

    We blame PML (N) for all the problems in the country but do not understand one basic thing that they were following a different approach. When PTI came and put an hold on their approach and brought in their own plan of action this was bound to happen.

    Realistically looking the issue at the moment should not be what has happened to the economy but the issue should be do we have a plan of reviving the economy. At the moment what is happening is that PTI attempts at achieving one target and improving one indicator of the economy while another goes wrong.

    I hope that the domino affect does not happen and we do not go into a state where reviving economy could become very difficult.

    For me at the moment the biggest issue in the economy is the hot money which is being poured into. This shall be good for very short term but a cause of concern in the middle to long term if it stays in the system.
     
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  4. blueazure

    blueazure FULL MEMBER

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    people call me a tax chor, a patwari and what not , while i merely point out to what the 'elites' do in governments


    this is what happens -

    1. print money via a communist style centrally planned central bank ( aka state bank pakistan) . mind you, this money has nothing backing it , no gold, nothing , just a word of govt.... this gives an illusion of wealth in society in the form of cash and cheap credit . when the bubble bursts( real estate ,stock market corrections) , the central bank increases interest rates and 'strangulates' the economy into an artificial recession and slow down. ( like nowadays in pakistan) . in another absurdity , euro zone has lowered interest rates in NEGATIVE territory to boost growth( madness) .

    2. to control the rampant money printing disease , the elite then imposes ' taxes ' aka deflation to curb the menace of excess money ,when all the communist style central bank can do is simply 'print' more money , but hey, that would lead to hyper inflation ( read weimar republic, zimbabwe, argentina, etc) and totally wreck the trust of people in the national currency .( leading to economic and social chaos ,)

    3. when point#2 above has wrecked economies ( like argentina, greece, etc), the 'elite' sitting in governments contacts their 'higher' ups in IMF to ' bail ' them out via more loans and credit ( whose terms are never made public) .

    4 . pt1,2,3 all lead to one thing = economic enslavement of not just people , but whole nations .( without firing a bullet)


    ------------------

    PTI, PMLN , PPP are all just pawns of the same intl elite . everything is the same as before. . more loans are being taken to pay off old ones . has anyone cleared his credit card bills ever ?

    immi doesnt know it ,, yet he has been fooled into the same wizardry ....


    ---------------
     
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  5. Zibago

    Zibago ELITE MEMBER

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    Wow such a stable genius
     
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  6. ejaz007

    ejaz007 SENIOR MEMBER

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    Your post made me remember the line from the movie Shooter:

    "There are no sides. There's no Sunnis and Shiites. There's no Democrats and Republicans. There's only HAVES and HAVE-NOTS."

    Perhaps we went through the same thing. One party did not entirely fall in line and got replaced.

    Your post made me remember the line from the movie Shooter:

    "There are no sides. There's no Sunnis and Shiites. There's no Democrats and Republicans. There's only HAVES and HAVE-NOTS."

    Perhaps we went through the same thing. One party did not entirely fall in line and got replaced.
     
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  7. Vortex

    Vortex SENIOR MEMBER

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    In my humble opinion, and if I’m not wrong (as my economics lessons are more than several decades old) to fix the situation we should invest in business in a strategic business which will let us to earn money. Which will in return increase the budget of State, we will be able to payback all our loans.

    But first we have to identify the sector or sectors which will have the best ROI for us and sectors for which have or could have easily skilled people. We should develop organisations which help businessmen to improve their marketing, their products quality, their exports by giving them support about foreigns markets etc,.. i mean organisations lead by young generations and not by old people who even don’t know how to use computers... in other words people with modern thinking.


    Here in France we often have Forums for innovation and investment where young skilled peoples present their projects and if any investor is interested in their project can inject a healthy amount of investment... it’s just an example.

    It will take time, lot of time counting in years but we could do it. And we should do it. But yes we need honesty and stability, rule of honest law, protection of intellectual properties, accountability etc.

    Even if we invest 100 millions dollars* on strategic sectors each years, with a well planned action plan with milestones etc in 10 years those sectors could become the backbone of our economy, our industrialisation etc. I’m not taking about chakku choorian or football article industries.




    * amount given as an example only.
     
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  8. blueazure

    blueazure FULL MEMBER

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    control finance.. and you control the world...

    debt,income taxes, credit =all tools of financial serfdom,,


    i worked with seths and these elites, they never pay a single paisa in taxes,,
     
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  9. nahtanbob

    nahtanbob BANNED

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    central planning does not work
     
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  10. Vortex

    Vortex SENIOR MEMBER

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    I’m not talking about central planning but about catalytic role of State’s institutions in the development, and of course by involving industrialists, businessmen and private banking systems.
     
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  11. Norwegian

    Norwegian ELITE MEMBER

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    This pretty much sums up the problem