Lowering debt-to-GDP ratio

By Sultan Ahmed

http://www.dawn.com/2007/06/18/ebr11.htm

The government wants to reduce the national debt to GDP ratio to 20 per cent from about 50 per cent now over a period of 10 years, says Dr Salman Shah, advisor to the prime minister on finance. It translates into a rate reduction of 2.5 per cent of the debt per annum. This is a very desirable goal that would be helpful to the economy.The debt reduction will help increase the investment and accelerate the rate of growth as more resources are diverted towards development to provide employment to the over 100 million people under the age of 25.Lower national debt means less financial resources devoted to debt servicing and more funds diverted to development and social welfare. The total national debt has come down from an untenable over 100 per cent of GDP to 50 per cent.Privatisation minister Zahid Hamid says that privatisation has so far brought $7 billion which has been used largely for debt reduction. The budgeted privatisation proceed for next year is Rs75 billion, 90 percent of which will go towards debt servicing as committed by the government.As the major assets of the country like PTCL, Pakistan Steel and the refineries are privatised, the liabilities of the government should also be simultaneously liquidated. To set up such public sector projects, large loans, foreign and domestic were raised. And when these projects are sold off, the proceeds should be used to pay off debts and that should not been done through taxation.In fact heavy foreign borrowings are a risk because, in case of devaluation of the rupee, they raise the rupee cost of the loans substantially. Already the rupee has come down from 3.33 to a dollar in 1953 to 60.62 for a dollar now. As the rupee gets devalued, the rupee value of the debt goes up and strains the governments resources.Though rising in absolute numbers, external debt-to-GDP ratio is coming down gradually. But the domestic debt is increasing and along with it the cost of debt servicing The domestic borrowing is too heavy as the governments monetary needs are rising.The domestic debt servicing cost is rising despite lower interest rate for official borrowing. For example ,the government has borrowed overRs90 billion from the national savings organisation at low interest. In spite of the clamour for higher interest rates on National Savings Schemes, the government has not increased the rates to help the small savers in the face of a surging food and consumer price inflation.Servicing of foreign debt this year will cost Rs48.417 billion and the foreign loan repayment will be Rs54 billion-Rs2 billion less than the budgeted. Next year it will be Rs62.88 billion. The figure is rising.The level of foreign debt was reduced after 9/11 when donors wrote off their small loans following 9/11 as Pakistan joined the coalition against terrorism. Some of the loans from Britain and the European countries were converted into contributions for education and social welfare. Some of the donors came up with other forms of relief and reduced the interest rates. In the case of the US, repayment of the small loans were suspended forsix years, where new loans were given. Now is the time to resume such repayments.The budgeted figure for next year for borrowings from the central bank is Rs130 billion. Such bank borrowing through printing of extra currency has upset the governor of the State bank Dr Shamshad Akhtar as it adds to the money in circulation and aggravates the inflation. But the government finds it a handy process as, while it pays the interest on bank borrowing through one hand, it collects the same as dividend by the other hand as the State Bank’s sole shareholder. The StatBank wants the government to borrow money from the public including banks and reduce inflation.The government is resorting to such heavy bank borrowing despite of the large tax receipts it will collect next year to the extent of Rs1.03 trillion. This is an election year and the government prefers to seek votes by making various gestures and offers and relying on bank borrowing to fund that.The government should stick to the target of bringing down the national debt to 20 per cent of the GDP which will be truly helpful to the government and the country.

Source: Dawn Newspaper