The macroeconomic problems faced by Pakistan today are the result of poor economic management and deteriorating governance over the last two decades. Between 1988 and 1998, Pakistan negotiated three programmes with the International Monetary Fund (IMF), but because of the frequent changes of government and lack of political will these were never fully implemented. The fiscal deficit continued to average over 7 percent of GDP, and the average current account deficit increased to almost 5 percent. Public debt expanded rapidly and debt servicing even more, especially because of the increasing use of expensive short-term debt to finance the external deficit and high cost national saving schemes to finance the domestic deficit. The impact of the 1998 economic sanctions in the aftermath of the nuclear tests resulted in the collapse of the exchange rate and the beginning of a full-blown economic crisis. In 1998, total debt (both domestic and external) exceeded the GDP, total debt servicing accounted for 67 percent of all the government revenues, and external debt servicing accounted for 55 percent of export earnings, that is, Pakistan's debt indicators were worse than most heavily indebted poor countries. With Pakistans total public debt at the highest ever level of Rs9.473 trillion, the government has violated almost all the four limits on borrowing imposed in the Fiscal Responsibility and Debt Limitation Act. The total public debt stood at Rs8.894 trillion as of June 30, 2010, an increase of Rs1.265 billion or 16.6 percent higher than the debt stock at the end of last fiscal year, revealed a mandatory debt policy statement for 2010-11 released by the Ministry of Finance on Tuesday. The government borrowed Rs798 billion from domestic sources and Rs189 billion fromexternal sourcesto finance fiscal operations. Additionally, it borrowedRs271 billion from the IMF for the balance of payments support and incurred an exchange loss of Rs200 billion on the external debt portfolio because of the rupee depreciation against the US dollar. The total public debt, the statement said, deteriorated in the first quarter of the current fiscal year and stood at Rs9.473 trillion at the end of the first quarter (July-September) of fiscal 2011, registering an increase of Rs579 billion or 6.5 percent in just three months of the current fiscal year. Pakistans total external debt is likely to grow alarmingly by more than 43 percent over the next five years, to about $73 billion in 2015-16 from about $50.76 billion early this year. According to a report released by the IMF, the debt will increase by about 13 percent, or $6.4 billion to $57.1 billion, by the end of the 2010-11 fiscal year and is estimated to increase by 12.3 percent, or $7 billion to $64 billion, by the end of the next fiscal year. The Funds estimate suggests that the external debt will increase by another $2 billion in 2011-12 and cross $72.6 billion in 2015-16. The publicly guaranteed debts, including the IMF loans, are estimated to increase by 45 percent - from $47.26 billion on June 30, 2009 to more than $68.1 billion in 2015-16. Thus, the amount will increase to $53.3 billion during the 2010-11 fiscal year and $59.9 billion by the end of next year. The total medium- and long-term debt, which stood at about $41.5 billion at the end of June last year, will increase to $48.2 billion next year and reach $67.6 billion in 2015-16 - an increase of about 40 percent. There are reasons to believe that the countrys external loan is sustainable; the debt stock will remain moderate when compared with the size of the economy and external debt servicing will remain manageable. However, it is the domestic debt that is the cause of greater concern, which is rapidly becoming unsustainable. The situation of domestic debt may worsen, if estimates underlying assumptions for economic growth, interest rate and external trade are not fulfilled. The economic growth rate has been projected at 3 percent this year, 4 percent next year, and 5.5 percent in 2015-16. An increase in domestic debt will occur because of large fiscal and current accounts deficits, depreciation in exchange rate and uncontrolled borrowing. The Government of President Zardari would have to show exemplary restraint to restrict borrowing as provided in the budget for 2011-12. Any slippage on this account will have disastrous consequences for the country. Finance Minister Dr Abdul Hafeez Shaikh, a soft spoken and well intentioned man, is on record as having said that such increases lead to a higher debt servicing cost and restrict the governments ability to improve the condition of the people. It is not known if the President Zardaris government is impressed with this argument. Firstly, the Fiscal Responsibility and Debt Limitation Act of 2005 requires the federal government to take measures to reduce the total public debt and maintain it within prudent limits. But the government has violated all the five restrictions prescribed under the Act. A section of the Act required reducing the revenue deficit to nil not later than June 13, 2008, and thereafter maintaining a revenue surplus. The section has been violated by the government as revenue deficit approximated to Rs308 billion or 2.1 percent of GDP, instead of maintaining a surplus. Secondly, Section 2 of the Act requires ensuring that within a period of 10 financial years beginning from July 2003, the total public debt should not exceed 60 percent of the estimated gross domestic product for that year and thereafter. This limit also stands violated. As of June 30, 2010, the total debt stood at 60.6 percent of GDP, although the limit becomes applicable from the fiscal year 2012-13. Thirdly, the law requires that in every year beginning from July 2003, the total public debt is reduced no less than 2.5 percent of GDP for any given year, provided that social and poverty alleviation related expenditures are not reduced below 4.5 percent of GDP and budgetary allocation to education and health will be doubled from the existing level in 10 years. This section has also been violated as during fiscal year 2009-10, 0.7 percentage point of GDP was added to the stock of total public debt. The social and poverty alleviation related expenditure remained at 6.72 percent of GDP in 2009-10. Additionally, expenditure on health and education amounted to 0.76 and 1.77 percent of GDP, respectively. The Act required the federal government not to issue new guarantees, including those for rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments, for any amount exceeding 2 percent of GDP in a financial year. The government violated this limit as well. The improvement in the tax to GDP ratio is dictated by the circumstances, while equally important is the rationalisation of current expenditure and curtailment of non-productive outlays. This appears to lie beyond the capability of the present government. n The writer is a retired Secretary to Government of Pakistan and a member of the former Civil Service of Pakistan. Email: