Debt is more expensive than you think

Debt is more expensive than you think

Would you believe that out of 100 rupees the federal government spends every year, Rs52 goes to debt servicing? Unfortunately it’s true.

From July to September 2022, current expenditure by the federal government totaled Rs 1.832 trillion. Of this amount, 954 billion rupees was used for servicing domestic and external debt, according to the Quarterly Fiscal Review. Servicing the domestic debt alone consumed 835 billion rupees, equivalent to about 45.6% of current federal spending. The remaining 119 billion rupees, or about 6.5% of current expenditure, was used to service the external debt.

These figures are alarming. What is more troubling is that there is no indication that they will see any substantial change for the better in the next three quarters of the current fiscal year. Domestic debt service will continue to grow as high interest rates on government commercial bank borrowing are likely to remain high. Look at all the recent treasury bills and Pakistan investment bond auctions, and you may see a persistent upward trend in yields.

Servicing external debt will also cost more in rupees if the rupee continues to fall against major global currencies, especially the US dollar.

The Ministry of Finance and the State Bank of Pakistan (SBP) are making huge efforts to save the rupee from further depreciation. But all the good news of bailout currency flows from the International Financial Institutions (IFIs) as well as Saudi Arabia and China can do is help the rupiah make momentary gains.

Declining development spending will continue to undermine economic growth year on year, necessitating more future domestic and foreign loans

The local currency can only become sustainably strong when non-debt-creating currency inflows from exports, remittances, and foreign direct investment become large enough to have a real impact. This is not possible in the near future.

In addition, the cost of funds currently obtained from IFIs is significant in the context of future external debt servicing. What also matters is on what terms and in what forms the promised forex support of $9 billion would come from China and $4.2 billion from Saudi Arabia.

The higher cost of IFI funds and commercial loans embedded in the overall Chinese and Saudi currency support would obviously increase the cost of servicing external debt in this fiscal year and beyond. The final example of more costly external debt is a $500 million budget support loan Pakistan is seeking from the Asian Infrastructure Investment Bank (AIIB). The government recently approved the terms of this loan. The loan will be granted at a rate of around 5%, higher than that applicable to some foreign bank loans, according to credible media.

From July to September 2022, defense expenditure totaled around Rs 313 billion, or 17% of the Federal Government’s current expenditure. This means that domestic and foreign debt service (52%) and defense spending (17%) together accounted for 69% of total federal government spending. Where do you think the remaining 31% of current spending goes? This went to government employee pensions (9.3pc), daily government management (5.6pc), subsidies (5pc) and subsidies (10.9pc). Spending this high on each of these heads requires introspection and scrutiny. Is not it?

Some pertinent questions are: What results have the pension reforms undertaken by the PTI government produced? Why hasn’t the size of the government bureaucracy been reduced as recommended by reform leader Dr. Ishrat Husain?

Can a resource-starved country like Pakistan afford to spend up to 5.6% of its current expenditure just to run the government? Why can’t this enormous expense be reduced by reducing the size of the cabinet, the number of departments and divisions and by opting for austerity throughout the federal government?

Are the subsidies offered to the various segments of society and businesses well targeted and have they produced the desired results? If not, what is being done to make grants more targeted and results-oriented?

Where does the money allocated under “Grants to others (other than those covered by grants)” go? And what results have they produced so far? The federal “grants” normally go to the provinces, but also to bleeding state enterprises (SOEs).

The nation has a right to know why the financially corrupt and bleeding state enterprises continue to get “subsidies” and whether the offer of bailout “subsidies” has produced tangible and positive results.

The PML-N-led coalition government had promised to speed up the privatization process, but between July and September not a single rupee was generated from privatization, as the budget review reveals.

Why? When the hell will our loss-making state enterprises be privatized? What causes delays and how can these delays be overcome?

From July to September 2022, a tight fiscal situation led to very low development expenditure – only 219 billion rupees, of which 67 billion rupees came from the federal government and the remaining 152 billion rupees from the provinces.

Compare this national development expenditure of 219 billion rupees with 835 billion rupees spent on domestic debt servicing alone. In clearer terms, this means that out of every 1,054 rupees our government has on hand, it spends 835 rupees to pay mark-ups on domestic debts and only 219 rupees on development. Where Has Decades-Old Fiscal Misconduct Led Pakistan? Is it sustainable even for another decade?

Development spending ensures future economic growth. If development spending stays as low as it is today for a few more years, the outcome will be horrific for the economy. Decreasing development spending will continue to undermine economic growth year after year, necessitating more domestic and foreign loan generation.

And this means that debt service alone will continue to consume the bulk of budgetary resources, leaving less and less not only for development but, in the future, also for defence.

Posted in Dawn, The Business and Finance Weekly, November 14, 2022

#Debt #expensive

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