International financial institutions have been warning Pakistani rulers of low level of private sector investment in the country owing to increasing circular debt, power sector issues, unsatisfactory law and order situation and the depleting foreign exchange reserves.

The country lacks a proper investment regime and a comprehensive framework of investment, at present, which is often discouraging to the private investors as well. The present government has been unable to solve the power sector issue leading to very high inflation and the very low credit rating by Moody. The non-chalant manner in which power sector investment has been treated is evident from the fact that hydropower was once the major source of energy in Pakistan, accounting for nearly 45 percent of all electricity generation in 1991. However, this share dropped to 28 percent due to the lack of new hydropower plants, and the share of thermal generation has increased correspondingly. Approximately 70 percent of installed generation capacity is thermal and the vast majority of plants run on imported oil. Prudent debt policies and management are vital to the performance of most developing countries, and Pakistani leadership has to place a greater emphasis in these areas under the current circumstances.

Lower than anticipated GDP growth in the previous fiscal year has meant that any planned outlay of funds cannot be met by simultaneous increases in tax revenue. Coupled with the additional demand placed on government resources by the security situation in the country, these factors have meant that any increases in expenditure will have to be financed through debt creation. This environment of low revenue collection, pressure on expenditure and a significant fiscal deficit will only be sustainable in the presence of a comprehensive debt strategy. In essence, debt policies pursued during the year will determine the success in meeting the government’s increased financing requirement in a cost efficient way while reducing inherent risks to an agreeable level. This does not seem to be happening.

Presently, debt strategy exercised by the government is restricted to specific nominal levels of debt, and the break-up of financing between external, domestic bank sources, and non-bank sources that is laid out in the federal budget annually. The budget contains a breakdown of financing between foreign currency and domestic currency component.

The domestic debt is further divided into market debt (namely MTBs and PIBs) and national savings without any consideration to the tenor, timing and cost of funds. For 2011-12, the federal budget focuses on non-bank domestic sources for budgetary financing. However, the on-tap nature of NSS instruments hinders the alignment of this category of public debt to the budgeted amounts. There exists no clear and formal debt strategy and the entire process lacks cohesive vision.

Rudimentary debt operations are carried out by different agencies with little or no coordination. Similarly, the government debt instruments offered to the market are fragmented and provide different returns for the same credit quality and maturity. Furthermore, guidelines for the regulation of significant contingent liabilities, in the shape of provision of government guarantees, are neglected. Under these circumstances, it is difficult to set and more importantly, achieve debt management objectives/ benchmarks. It is important to note that while the federal budget identifies the levels of various sources of debt, no guidelines are provided with regards to optimal currency mix, distribution of tenor, and the exact timing of issuance. Presently, the only benchmarks present against which debt operations in the country can be measured are the level of debt-to-GDP (60 percent as laid out in the FRDL Act 2005) and the 2 percent of GDP limit placed on issuance of new guarantees. There is a need to formulate and adopt a holistic debt management strategy, a critical prerequisite of which is the centralization of debt management, decision making and implementation. By doing so, the government will be able to enhance policy coordination, and provide guidelines for the levels of debt as well as constitute strategic benchmarks for an optimal government debt portfolio. Strategic benchmarks must include, in addition to the debt-to-GDP levels, measures of debt service burdens, external sector solvency, refinancing ceilings, and considerations of currency and interest rate composition. It is learnt that the Debt Management Committee has begun a consultative process to establish these benchmarks. Like all committee recommendations, there is every likelihood that nothing tangible or beneficial will come out of the present committee.

Divergent trends between growth in foreign exchange earnings and government revenues on one hand, and foreign exchange payments and expenditure on the other hand, point towards underlying directional issues which need to be addressed. Furthermore, it is not possible to meet our external debt service obligations without seeking assistance from multilateral institutions.

On the domestic side, even though the fiscal position has shown some improvement over the last fiscal year (as well as achieving a reduction in primary deficit), high domestic debt servicing is translating into higher domestic borrowing and higher interest cost. Clearly, the external debt burden needs to be brought down so that Pakistan does not need exceptional financing from the international financial institutions (IFIs). Similarly it is desirable that zero real growth, if not nominal, be achieved in government domestic debt in order to relieve the pressure on domestic interest rates and capital markets. Export receipts and other foreign currency non-debt creating flows need to be increased above and beyond the growth of foreign exchange payments and growth of external debt and liabilities. By doing so, the government will be able to restrict the non-interest current account deficit, and ensure the sustainability of present levels of external debt. Failure to arrest the widening gap between foreign exchange inflows and outflows will severely hamper the government’s room to maneuver in case of future external shocks and may possibly lead to a balance of payment crisis and explosive debt path.

The writer is a retired secretary of the Government of Pakistan. Email: shakeelahmad1964@hotmail.com