Debt servicing eats up 66pc of tax money

[Syed1]

KARACHI: Two-thirds of the tax revenue collected in the first quarter of 2016-17 was used for debt servicing, leaving the government with less than 34 per cent of the total collection to run the country.

The Statistical Bulletin for December recently issued by the State Bank of Pakistan (SBP) said the country paid Rs414 billion in debt servicing during July-September.

The report showed the tax collection during the same quarter was Rs625bn. This means the government had to use 66pc of its entire tax collection for debt servicing in the first three months of the fiscal year.

Domestic interest payments dominated this expenditure with Rs392.7bn, which equals 94.8pc of the total interest payments of Rs414bn. Interest payments on foreign debt in the same quarter amounted to Rs21.6bn.

The tax-to-GDP ratio has been a critical issue for the government, which is trying hard to bring it in double digits. The government has received criticism for increasing taxes on the already taxed sectors of the economy instead of growing the tax base. The tax base in Pakistan is the lowest in the whole region, which supports the perception that tax evasion in the country is high.

Higher debt servicing has created a serious problem for the country because development expenditures face the axe to deal with revenue shortages. It also gives rise to fiscal deficit, forcing the government to borrow from the banking system.

Another report by the SBP shows the government has already set a new record of borrowing from the central bank. In the first five months of the current fiscal year, the government crossed the figure of Rs1 trillion, which indicates the increasing fiscal gap.

According to the SBP report, interest payments in 2015-16 amounted to Rs1,263bn while the tax collected during the same fiscal was Rs3,112bn. It shows debt servicing was 40.6pc of the tax revenue collected in 2015-16.

However, the first-quarter report of the current fiscal shows debt servicing was 66pc of the tax collected in the same three-month period, reflecting the alarming trend for the government that faces a low revenue collection, higher fiscal gap and low foreign inflows.

Experts believe domestic and foreign debt servicing will increase this year because the borrowing in the last four years was higher than preceding years. The government has accumulated record foreign exchange reserves of over $23bn. Most of these reserves were accumulated through borrowing. Domestic borrowing through banks and non-banks has crossed the figure of Rs8tr. This requires debt servicing that will ultimately hurt development projects and economic growth of the country.

http://www.dawn.com/news/1303713/debt-servicing-eats-up-66pc-of-tax-money

 

[Syed1]

Haan bhai [MENTION=132752]endymion248[/MENTION] loan tou achay hotay hain?

 

[HussainRx8]

Pakistan's external debt is dollar-denominated. As dollar appreciates, our debt servicing costs will balloon. This is what caused the Asian crisis in 1970s-80s. Hopefully, we aren't exposed to too much maturity mismatch.

 

[endymion248]

Haan bhai [MENTION=132752]endymion248[/MENTION] loan tou achay hotay hain?

Aren't you the guy who was arguing that Pakistan should borrow 20 bils to invest in attracting foreign universities to Pakistan? How exactly was that debt going to be serviced?

 

[KB]

Article here which emphasises that it is not just the quantum of debt, but the nature of Pakistan's debt, which is troubling.

https://profit.pakistantoday.com.pk/2017/06/12/whats-wrong-with-public-debt-in-pakistan/

What’s wrong with public debt in Pakistan
By Jazib Nelson - June 12, 2017

The issue of public debt in Pakistan has received a lot of attention from every concerned quarter. They have been many debates, seminars, and conferences on this subject. For the most part, the debate on public debt has centred on reducing it.

Incurring debt in principle is not bad per se. The key lies in sustainability of public debt. Developed economies with their astronomically high debt stocks have been able to sustainably manage it given their robust economic and institutional fundamentals. United States of America and Japan serve as examples of this.

Pakistani economy does not feature such strong fundamentals. But most importantly recent borrowing strategy by the government has aggravated this situation. Pakistan’s flawed borrowing strategy becomes clear when it is evaluated on two criterions. First, where is the money coming from? Second, where is the money going? Pakistani answer to both these questions raises serious concerns on sustainability of public debt in Pakistan.

Where the debt money comes from?

The government of Pakistan is borrowing heavily from domestic sources i.e. commercial banks. In FY 2000, almost half of the total public debt was from domestic sources. Now this has increased to 70%. Debt from domestic sources is more expensive than from external sources like International Financial Institutions (the fact that borrowing from such institutions involve stern conditions is a different debate altogether).

Based on the latest available data, interest rate on domestic loan was 11.3% in 2014 while interest rate on external debt was only 2.1% for the same year. Pakistani economy which is growing at a rate of 4-5% per year may encounter problem servicing domestic debt at an interest rate of 11.3%.

Apart from being expensive, payments will be due on almost half of the domestic debt within a year. While only 11 percent of the external debt will be due within a year. So Pakistan has to pay off the costly debt within short intervals of time. This fact has major implications for the Pakistani economy. In order to make room for high debt servicing, the government has to compromise spending on social sectors like education and health. Pakistan’s performance in health and education is already unpromising.

But these are not the only issues associated with high domestic borrowing. Over-reliance on domestic debt reduces the amount of credit available to private sector and renders the leftover credit expensive. Private sector which generates employment and is the lifeline of any economy is deprived of an essential opportunity to expand itself.

Issues are also present in external borrowing by the government. Since coming into power, the PML-N government has borrowed $655 million from Dubai-based Noor Bank at interest rate ranging from 4.1% to 4.71%. These are non-traditional sources of borrowing where terms of engagement are not transparent. Unavailability of this information can compromise parliamentary oversight on matters of public debt.

where the debt money goes?

Most of the borrowed money in Pakistan is used to build up foreign exchange reserves or used as a budgetary cushion by the government. Quite recently, the State Bank of Pakistan has borrowed $3.93 billion to bolster foreign reserves.

Pakistan is forced to undertake this practice since it earns less foreign exchange through exports than it has to spend on its imports. In addition to this, in order to maintain the value of rupee, Pakistan needs dollars to effectively intervene in the foreign exchange market. Dollar stability is mostly viewed in Pakistan as a symbol of political achievement. So any incumbent government tries to keep it under control for political gains.

Such policy choices are diverting borrowed money from development sectors such as health and education. Spending on these areas can improve Pakistan’s debt carrying capacity in the long-run. But the current regime of spending most of the debt money on non-development sectors would induce even more borrowing in the future to pay off previously contracted debt.

Pakistan’s borrowing strategy which is dominated by excessive domestic borrowing and obsession with building foreign exchange reserves may render its public debt stocks unsustainable. It will hurt both private and development sectors. On top of that, a defective debt strategy has the potential to impair the policy space available to the policy makers because in some cases the creditor may steer the helms of the economy in order to ensure smooth repayments. The $6.6 billion Extended Fund Facility of International Monetary Fund (IMF) that Pakistan undertook in 2013 included various restrictions on the Government of Pakistan in terms of domestic policy choices.

There is both good debt and bad debt. Unfortunately, policy choices in Pakistan are relying more on bad debt. Such policy choices are a product of political ambitions which are most of the times oblivious of the tenets of sound economics.

 

[TalentSpotterPk]

[MENTION=138254]Syed1[/MENTION]


Sharif's competent naheen hein ? Capable naheen hein ? ya will nai hai ?


Irrespective of whether they are absolute or partial corrupt or dead honest why they failed to Reform FBR ?


Mian sahib promised to break Kashkol instead they replaced Kashkol with Techi Case.


In terms of Revenue Collection significant improvement has been made by PTI led KPK government. (Source Economic Survey of GOP)